Registration No. ___________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
HEALTHWATCH, INC.
(Exact name of Registrant as specified in its charter)
Minnesota
(State or other jurisdiction of
incorporation or organization)
3845
(Primary Standard Industrial
Classification Code Number)
84-0916792
(I.R.S. Employer Identification No.)
HEALTHWATCH, INC.
2445 Cades Way
Vista, California 92083
(619) 598-4333
(Name, address, including zip code, and telephone number
including area code, of Registrant's principal
executive offices)
Lindley S. Branson
HEALTHWATCH, INC.
2445 Cades Way
Vista, California 92083
(619) 598-4333
(Name, address, including zip code, and telephone
number including, area code, of agent for service of process)
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / X /
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Calculation of Registration Fee
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Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount to be Offering Aggregate Registration
Securities to be Registered Registered Price per Share Offering Price Fee
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<S> <C> <C> <C> <C>
Common Stock, $.07 par
value 280,000 shs. $2.70 $756,000 $260.69
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The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8, may
determine.
SUBJECT TO COMPLETION, JULY 29, 1996
HEALTHWATCH, INC.
280,000 SHARES
COMMON STOCK
This Prospectus relates to the offer and sale from time to time by
certain Selling Shareholders of up to 280,000 shares of the Common Stock, $.07
par value (the "Common Stock"), of HealthWatch, Inc. ("HealthWatch" or the
"Company"). The shares offered hereby are subject to outstanding stock purchase
warrants (the "Warrants"). See "Principal and Selling Shareholders."
The Selling Shareholders may sell the shares of Common Stock in one or
more transactions in the Nasdaq Small Cap Market, or otherwise, at market prices
prevailing at the time of sale, at prices relating to such prevailing market
prices, or at negotiated prices. It is anticipated that the brokers and dealers,
if any, participating in the sales of such securities will receive the usual and
customary selling commissions. See "Plan of Distribution" and "Principal and
Selling Shareholders." The Warrants grant to the holders thereof the right to
acquire shares of Common Stock from the Company at an exercise price of $2.70
per share. The exercise of the Warrants is at the discretion of the holders and
there is, therefore, no assurance that any of the Warrants will be exercised.
The Company's Common Stock is traded in the over-the-counter market
under the Nasdaq symbol HEAL. On July 23, 1996, the last reported sale price of
the Common Stock, as reported on the Nasdaq Small Cap Market was $3.50 per
share. See "Price Range of Common Stock."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD
BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Since the Common Stock offered pursuant to this Prospectus is being
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Act"), the Company cannot include
herein information about the price to the public of the Common Stock or the
proceeds to the Selling Shareholders. The Company will receive no proceeds from
any sales of Common Stock by the Selling Shareholders, and the Company is
obligated to pay the expenses of this offering, which are estimated at $15,000.
The Selling Shareholders will pay their own expenses in connection with sales of
the Common Stock. The Selling Shareholders and any brokers or dealers executing
selling orders on their behalf may be deemed "underwriters" within the meaning
of the Act, in which event the usual and customary selling commissions which may
be paid to the brokers or dealers may be deemed to be underwriting commissions
under the Act. There can be no assurance that any or all of the shares
registered hereunder will be sold. See "Plan of Distribution."
THE DATE OF THIS PROSPECTUS IS AUGUST __, 1996.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission. Reports, proxy statements and other information filed by the Company
with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street N.W., Washington, D.C. 20549, and inspected at the Commission's regional
offices at Room 7 World Trade Center, New York, New York 10048 and Suite 1400,
500 West Madison Street, Chicago, Illinois 60661. Copies of such material can
also be obtained from the Public Reference Section of the Commission, 450 Fifth
Street N.W., Washington, D.C. 20549, at prescribed rates.
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act of 1933, with
respect to the securities offered hereby. This Prospectus omits certain
information included in such Registration Statement. For further information
about the Company and its securities, reference is made to such Registration
Statement and to the exhibits filed as part thereof or otherwise incorporated
therein. Each summary in this Prospectus of information included in the
Registration Statement or any exhibit thereto is qualified in its entirety by
this reference to such information or exhibit.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements appearing elsewhere in this
Prospectus. Except as otherwise noted, all information in this Prospectus has
been adjusted to reflect a one-for-seven reverse split of the Common Stock
effective as of May 13, 1996.
THE COMPANY
HealthWatch develops, manufactures and markets medical products,
including the Pacer, a new infusion therapy ("IV") device, Cambridge
electrocardiograph stress test systems and Life Sciences vascular diagnostic
systems. The Company's primary focus since 1993 has been on the development of
the Pacer. The Pacer, which is less expensive, smaller and lighter and easier to
use than most competing infusion therapy devices, has recently been introduced
to the marketplace.
Prior to the introduction late in the 1980s of diagnostic-related
groups ("DRGs"), health-care providers were generally compensated for their
services on a cost-plus basis. In this environment, product features and
technology drove product purchase decisions, even if the benefits derived from
the added features and higher technology did not justify the higher cost. With
the advent of DRGs and managed care, third-party payors shifted their payment
policies toward fixed fees for services rendered or capitated payment
arrangements whereby providers were reimbursed a fixed amount for patients
serviced by their organizations. In today's health-care environment, providers
are required to focus on cost, to carefully match patient benefits with the cost
of the services provided.
HealthWatch's strategy is to develop and market medical products
designed to improve the cost-effective delivery of high-quality health care. The
Pacer, the Company's first infusion therapy product, enables hospitals,
long-term care facilities, home-care agencies and others to maintain the quality
of the IV therapy they provide while also reducing significantly the cost of
such services. These cost savings are achieved both due to the Pacer's
substantially lower price than the price of most competing IV systems and
because the Pacer can be used with generic IV tubing which usually is
substantially less expensive than proprietary dedicated IV tubing required to be
used with most competing systems.
Markets for the Company's Cambridge and Life Services diagnostic
products have been adversely affected by efforts to contain health-care costs as
well as by the efforts of many hospitals and other health-care institutions to
reduce their costs by consolidating operations with the operations of other
institutions. This consolidation has resulted in fewer customers for these
diagnostic products and for delays in obtaining purchase orders from
institutions which are evaluating possible consolidations. In contrast, the
Company believes that its IV products will benefit from the health-care
industry's focus on reducing costs, as these products are less expensive and
easier to use than most competing products.
HealthWatch's executive offices are located at 2445 Cades Way, Vista,
California 92083, telephone number (619) 598-4333.
THE OFFERING
Securities Offered........................ 280,000 shares of Common Stock.
Securities Outstanding:
Common Stock.......................... 1,693,234 shares(1)
Preferred Stock....................... 200,000 shares(2)
Use of Proceeds........................... The Company will not receive any
of the proceeds from the sale of
Common Stock by the Selling
Shareholders. The Company would,
however, receive proceeds from the
exercise of Warrants by the
Selling Shareholders prior to the
sale pursuant to this offering of
the Common Stock subject to the
Warrants. Such proceeds, if any,
will be used for working capital
purposes, including the purchase
of raw materials required to build
initial product inventory for the
Pacer, marketing and sales
expenses related to the
introduction of this product and
product development.
Risk Factors.............................. Prospective investors should
review carefully and consider the
factors described under "RISK
FACTORS," including the Company's
recent operating losses, need for
additional financing and
introduction of new products.
Nasdaq Symbol for Common Stock............ HEAL
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(1) Shares outstanding at July 25, 1996. Does not include up to 1,296,028
shares of Common Stock reserved for issuance upon the exercise of stock
purchase warrants (including the Warrants) and options or the
conversion of the Company's 10% Convertible Senior Debentures (the
"Debentures") or Series A Preferred Stock ("Preferred Stock"). The
Board of Directors of the Company has approved offering the holders of
the Debentures the right to convert their Debentures into shares of
Common Stock at a reduced conversion price of $2.75 per share. To take
advantage of the reduced conversion price, Debenture holders will be
required to convert their Debentures within the period given for such
opportunity or have the conversion price for their Debenture revert to
the current conversion price of $14.00 per share. See "Description of
Securities."
(2) The Preferred Stock currently is convertible into 28,571 shares of
Common Stock at a conversion price of $10.50 per share. The Preferred
Stock becomes convertible into Common Stock beginning August 12, 1996,
at a conversion rate equal to $10.50 divided by the lesser of $7.00 or
50% of the market value (but not less than $1.75) of the Company's
Common Stock on the conversion date. Holders of the Preferred Stock
have indicated that they intend to convert the Preferred Stock into
Common Stock on or after August 12, 1997. Based on the current market
price for the Company's Common Stock, the Preferred Stock will, as of
August 12, 1997, be convertible into approximately 160,000 shares of
Common Stock. The Preferred Stock is redeemable at the option of the
Company at a redemption price of $1.50 per share.
SELECTED FINANCIAL DATA
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STATEMENT OF INCOME DATA:
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
-------------------------------- ------------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Product sales $1,531,833 $2,953,238 $3,516,252 $4,070,146 $6,094,862
Gross margin 358,371 843,851 1,116,709 1,118,656 2,774,040
Loss from continuing operations (1,196,671) (1,223,717) (1,843,239) (2,000,959) (1,571,138)
Total other income (expense) (32,656) (47,439) 12,785 (839,654) (54,764)
Loss from continuing
operations before discontinued
operations and extraordinary item (1,229,327) (1,271,156) (1,830,454) (2,840,613) (1,625,902)
Discontinued operations:
Income from discontinued
operations of medical
services segment -- -- -- -- 186,797
Gain on sale of medical
services segment -- -- -- -- 288,697
(Loss) before extraordinary item (1,229,327) (1,271,156) (1,830,454) (2,840,613) (1,150,408)
Gain(loss) from reduction in
debt obligation (receivable) -- (13,639) 61,603 24,328 102,433
Net income (loss) $(1,229,327) $(1,284,795) $(1,768,851) $(2,816,285) $(1,047,975)
============ ============ ============ ============ ============
Income (loss) per share of
Common Stock:
Continuing operations $ (1.05) $ (3.32) $ (4.55) $ (10.39) $ (9.39)
Discontinued operations -- -- -- -- 2.75
Extraordinary item -- -- .15 .09 .59
-------- -------- ------ ------ -----
Net income (loss) per share $ (1.05) $ (3.32) $ (4.40) $ (10.00) $ (6.05)
====== ====== ======= ======== ======
Weighted average number of
shares outstanding 1,169,871 387,393 402,310 273,273 173,084
</TABLE>
BALANCE SHEET DATA:
March 31, 1996
--------------
Current Assets $1,343,710
Total Assets 2,781,235
Current Liabilities 751,936
Long-Term Debt 580,000
Accumulated Deficit (11,216,750)
Shareholders' Equity 1,449,299
Working Capital $ 591,774
RISK FACTORS
In addition to considering the other information set forth in this
Prospectus, prospective purchasers should carefully consider the following
factors in evaluating an investment in the Company.
DECLINE IN REVENUES; RECENT OPERATING LOSSES
The Company's product sales have declined in each of the past three
fiscal years and nine months, compared to the prior fiscal year or similar
nine-month period, primarily due, the Company believes, to the uncertainty in
the medical community regarding the effects of various proposals for health-care
reforms, consolidations and mergers of health-care institutions, continued
increased price competition and the Company's lack of sufficient working capital
to adequately fund marketing and product enhancement efforts. In view of the
Company's belief that there is substantially more potential for its IV products
than for its diagnostic products, HealthWatch intends to concentrate its efforts
and limited working capital on the marketing of the Pacer, its first IV product.
While marketing of the Pacer has begun, the Company does not expect to be able
to produce and ship significant quantities of the Pacer for several more months.
The Company's sales may, therefore, continue to decrease for the next six or
more months.
The Company has incurred losses from operations in each of its last
three fiscal years. The Company expects to continue to incur losses from
operations until it is able to generate significant sales of the Pacer. The
Pacer is in the initial marketing stage and there can be no assurance that the
Company will be able to realize significant revenues from the sale of the Pacer.
In addition, if the Company is not able to generate sufficient sales of its
existing products to support the value of certain inventory items or of the
intangible assets relating to certain of these products, it could be required to
recognize significant additional losses in connection with the write-down of
these assets for book purposes. At March 31, 1996, the Company had an
accumulated deficit of ($11,216,750). There can be no assurance that the Company
will be able to operate at a profit in the future. The Company is not able to
finance current working capital requirements from operations.
NEED FOR ADDITIONAL FINANCING
The Company estimates that it needs approximately $800,000 of
additional debt or equity capital to sustain its operations during the next
twelve months. In addition to the $800,000 required to sustain operations, the
Company estimates that it will need to obtain from $800,000 to $1,400,000 of
additional working capital to fully implement its marketing plan for the Pacer
and to provide adequate working capital to fund a rapid increase in product
sales. In the event that the Company is unable to raise additional capital, it
will be required to defer producing IV or other products, to sell certain assets
or enter into joint ventures with or grant licenses to other companies with
respect to one or more of its products and/or further reduce its operations in
order to sustain operations. There can be no assurance that the Company could,
if it were required to do so to sustain operations, sell any such assets or
enter into any such joint venture or grant any such license, if at all, on terms
acceptable to the Company.
METAMED ACQUISITION; NEW BUSINESS VENTURE; UNPROVEN PRODUCTS
In September 1993, the Company completed the acquisition of Metamed,
Inc., a development-stage company. The Metamed acquisition represented a
significant new business venture for HealthWatch, and the Company's ability to
successfully develop this business is subject to all of the risks inherent in
the establishment of a new business. HealthWatch had not previously been engaged
in the infusion therapy business and Metamed had only a limited history of
operations and had not generated any revenues.
HealthWatch believes that the Metamed acquisition is of strategic
importance because it offers the Company the opportunity to expand its product
offerings to include medical products which it believes will be less sensitive
than its existing diagnostic products to current market pressures and
uncertainties, as the Company's infusion therapy products are expected to be not
only easier to use but also less costly than existing competing products. While
the first IV product, the Pacer, an IV controller, has recently been introduced,
there can be no assurance that it will achieve wide acceptance in the
marketplace. Efforts to obtain required governmental approvals for additional
products based on the proprietary technology may be costly and require
significant time and additional effort on behalf of the Company which could
further deplete the Company's limited resources and delay the introduction of
additional IV products. There can be no assurance that the Company will be able
to obtain necessary governmental approvals for additional IV products or that
any products based on the proprietary technology can be successfully introduced
to the marketplace.
DEPENDENCE ON SUPPLIERS; WORKING CAPITAL REQUIREMENTS
Certain raw materials for the Company's products, particularly its new
IV product, are available from only one or a limited number of suppliers,
require that orders be placed 60 days or more in advance of the desired delivery
date and may be available to the Company only if it places significant orders
which represent several months or more of the Company's projected needs for such
materials. The need to purchase significant quantities of these materials in
advance of their use substantially increases the Company's working capital
requirements.
There can be no assurance that the Company's current suppliers for
these products will continue to supply them to the Company. While alternative
sources for such items are generally available, the Company could be required to
redesign its products in order to be able to use the alternative materials
provided by these additional suppliers. Any such redesign of the Company's
products could be expensive and time consuming and could require six or more
months to complete. The Company believes that it either has or has commitments
to supply adequate quantities of the more difficult to obtain components for its
initial IV product.
DEPENDENCE ON NEW OR IMPROVED PRODUCTS; TECHNOLOGICAL CHANGES
In general, the medical products industry is subject to rapid and
significant technological changes and frequent introduction of new competitive
products. To respond to these expected changes and to improve or sustain the
marketability of its products, the Company will be required to commit
substantial investments in product improvement and development in order to
periodically enhance its existing products and successfully introduce new
products. There can be no assurance that the Company will either have the
resources required to make such investments or, assuming it has the required
resources, be able to respond adequately to changes in technology or changes in
the markets for its products. The development of new products or technologies by
other firms could have a material adverse effect on the Company's business. In
addition, to the extent that the Company seeks to develop new products, there
can be no assurance that such products will be successfully developed or, if
developed, that such products will be successfully introduced to the
marketplace.
LENGTH OF SALES CYCLE; LIMITED SALES AND MARKETING EXPERIENCE
The decision to purchase IV equipment is often an enterprise-wide
decision by prospective hospitals or other health-care customers and may require
the Company to engage in a lengthy evaluation/purchase-sales cycle. The sales
cycle for IV instruments can range from three to nine months or more. The sales
cycle may also be subject to a prospective customer's budgetary constraints and
internal acceptance reviews, over which the Company has little or no control.
Consequently, if sales forecasted from a specific customer for a particular
quarter are not realized in that quarter, the Company is unlikely to be able to
generate revenue from alternate sources in time to compensate for the shortfall.
If a larger order is delayed or lost to a competitor, the Company's revenues for
that quarter could be materially diminished.
The Company has limited experience in the areas of sales, marketing and
distribution. The Company's sales and marketing staff will require additional
personnel in the future.. There can be no assurance that the Company will be
able to build an adequate sales and marketing staff, that establishing such a
sales and marketing staff will be cost-effective, or that the Company's sales
and marketing efforts will be successful.
LIMITED AVAILABILITY OF PROPRIETARY PROTECTION
The Company historically has relied upon a combination of copyright,
trade secret and nondisclosure and other contractual provisions to protect its
proprietary rights. While the Company's licensed IV technology includes a U.S.
patent, this patent may not provide significant protection with respect to the
development of a competing product with capabilities similar to the Company's
initial IV product. Notwithstanding the Company's efforts to protect its
proprietary rights, it may be possible for competitors of the Company to imitate
the Company's products or develop independently competing products.
Disputes regarding the Company's intellectual property could force the
Company into expensive and protracted litigation or costly agreements with third
parties. An adverse determination in a judicial or administrative proceeding or
failure to reach an agreement with a third party regarding intellectual property
rights could prevent the Company from manufacturing and selling certain of its
products, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
There are many companies that produce equipment which competes with the
Company's products, particularly its cardiology and current and proposed
infusion therapy products. Most of the Company's competitors have substantially
greater financial and marketing resources than the Company. Three companies
account for a substantial portion of the market for ECG products similar to
those sold by HealthWatch, and a few companies account for over 80% of the U.S.
market for infusion therapy systems. All of such companies are substantially
larger than HealthWatch. The Company expects that these competitors will
continue to compete aggressively with tactics such as offering volume discounts
based on "bundled" purchases of a broader-range of medical equipment and
supplies, a tactic that the Company is unable to pursue except on a joint
venture basis. There can be no assurance that such competition will not
adversely affect the Company's results of operations or its ability to maintain
or increase sales and market share. Competition could require that the Company
commit significantly greater resources to the introduction of its IV products
than would otherwise be required.
The market for infusion therapy products is affected by continuing
improvements and enhancements in technology. There can be no assurance that the
Company's competitors or potential competitors will not succeed in developing or
marketing products that provide more desirable characteristics, or are more
effective or less expensive than those developed or marketed by the Company. In
addition, technological advances in drug delivery systems, the development of
therapies that can be administered by methods other than infusion therapy, and
the development of new medical treatments that cure certain complex diseases or
reduce the need for infusion therapy could adversely impact the Company's
business.
LIMITED ASSEMBLY EXPERIENCE
The Company's products are currently assembled by the Company at its
facility. To be successful, the Company must assemble its products in compliance
with regulatory requirements, in sufficient quantities and on a timely basis,
while maintaining product quality and acceptable assembly costs. The Company has
limited experience assembling its products in large commercial quantities. There
can be no assurance that the Company will be able to assemble products in large
commercial quantities on a timely basis and at an acceptable cost. If the
Company becomes unable to assemble the Pacer at its facility in a timely and
efficient manner, the Company's ability to supply product to its customers may
be adversely affected until such time as the Company is able to establish
alternative assembly arrangements.
DEPENDENCE ON THIRD-PARTY REIMBURSEMENT
The Company's products are generally purchased by health-care
providers, which then seek reimbursement from various public and private
third-party payors, such as Medicare, Medicaid and indemnity insurers, for
health-care services provided to patients. Government and private third-party
payors are increasingly attempting to contain health care costs by limiting both
the extent of coverage and the reimbursement rate for new diagnostic and
therapeutic products and services. The Health Care Financing Administration of
the United States Department of Health and Human Services ("HCFA"), which
administers Medicare, and most private insurance companies do not provide
reimbursement for services that they determine to be experimental in nature or
that are not considered "reasonable and necessary" for diagnosis or treatment.
Many private insurers are influenced by HCFA actions in making their own
coverage decisions on new products or services. There can be no assurance that
third-party reimbursement for the services provided using the Company's products
will continue to be available to its customers or that any such reimbursement
will be adequate. Disapproval of, or limitations in, coverage by HCFA or other
third-party payors could materially and adversely affect market acceptance of
the Company's products which could, in turn, have a material adverse affect on
the Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are
subject to regulation by the FDA and, in some instances, by state and foreign
authorities. Pursuant to the Federal Food, Drug, and Cosmetic Act (the "FFDCA")
and the regulations promulgated thereunder, the FDA regulates the clinical
testing, manufacture, packaging, labeling, distribution and promotion of medical
devices.
Pursuant to the FFDCA, medical devices intended for human use are
classified into three categories, Classes I, II and III, on the basis of the
controls deemed necessary by the FDA to reasonably assure their safety and
effectiveness. Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to good manufacturing practice
("GMP") regulations) and Class II devices are subject to general and special
controls (for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval ("PMA") from the FDA to ensure their safety and
effectiveness (for example, life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices). Electronic infusion devices are classified by the FDA
as Class II medical devices.
If a new Class II medical device is substantially equivalent in terms
of safety and effectiveness to a medical device already legally marketed in the
United States, the FDA requirements may be satisfied through a procedure known
as a "510(k) Submission," in which the applicant provides product information
supporting its claim of substantial equivalency. "Substantial equivalence" means
that a device has the same intended use and the same technological
characteristics as the legally marketed device, or the same intended use and
different technological characteristics, provided that it can be demonstrated
that the device is as safe and effective as the legally marketed device, and
does not raise different questions regarding safety and effectiveness. A
"legally marketed device" to which a new device may be compared for a
determination regarding substantial equivalence is a device that was legally
marketed prior to May 28, 1976, when the Medical Device Amendments were added to
the FFDCA, or a device which has been reclassified from Class III to Class II or
I, or a device which has been found to be substantially equivalent through the
510(k) premarket notification process.
Commercial distribution of a device for which a 510(k) Submission is
required can begin only after the FDA issues an order finding the device to be
"substantially equivalent" to a legally marketed device. The FDA has recently
been requiring a more rigorous demonstration of substantial equivalence than in
the past. This may include a requirement for clinical testing of the device. It
generally takes from four to twelve months from submission of a 510(k) to obtain
a 510(k) clearance, but it may take longer. The FDA may determine that a
proposed device is not substantially equivalent to a legally marketed device, in
which case a PMA may be required, or that additional information is needed
before a substantial equivalence determination can be made, in which case data
from safety and effectiveness tests, including clinical tests, may be required.
A "not substantially equivalent" determination or a request for additional
information could delay the market introduction of new products that fall into
this category.
The Company received 510(k) clearance to begin marketing the Pacer in
the United States in April 1994.
The FFDCA requires the filing of a new 510(k) Submission when, among
other things, there is a major change or modification in the intended use of the
device or a change or modification, including product enhancements, to a legally
marketed device that could significantly affect its safety or effectiveness. A
device manufacturer is responsible for making the initial determination as to
whether a proposed change to a cleared device or to its intended use
necessitates the filing of a new 510(k) Submission.
The Company does not believe that changes made to the Pacer since the
original 510(k) Submission require a new 510(k) Submission for the Pacer.
However, there can be no assurance that the FDA would agree with the Company's
determination. If in the future the FDA concluded that the changes required a
new 510(k) Submission, the FDA could prohibit the Company from marketing the
Pacer until the Company files a new 510(k) Submission and obtains clearance from
the FDA. The FDA could also take regulatory action against the Company for any
prior distribution of the Pacer which incorporated such changes. Alternatively,
the FDA could use its discretion not to take any regulatory steps with regard to
this issue.
The Company is currently preparing a new 510(k) Submission for the
Pacer in order to incorporate two new features, an automatic flow stop and an
increased rate range for infusions. Additional product modifications, including
new software features, that the Company may develop in the future will likely
require 510(k) clearance if the modifications could affect the safety or
efficacy of the Company's products. If the Company determines that any
modifications that it may make to its cleared devices do not require a new
510(k) Submission, there can be no assurance that the FDA would agree with the
Company's determinations and would not require a new 510(k) Submission for any
modifications made to the devices. If the FDA requires the Company to file a new
510(k) Submission for any modification to the device, the Company may be
prohibited from marketing the device as modified until it obtains clearance from
the FDA. There can be no assurance that the Company will obtain 510(k) clearance
on a timely basis, if at all, for any device modification for which it files a
future 510(k) Submission. If 510(k) clearance is granted, there can be no
assurance that it will not contain significant limitations in the form of
warnings, precautions or contraindications with respect to conditions of use.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. Device manufacturers are required to register their establishments and
list their devices with the FDA, and are subject to periodic inspections by the
FDA and certain state agencies. The FFDCA requires devices to be manufactured in
accordance with GMP regulations which impose certain process, procedure and
documentation requirements upon the Company with respect to manufacturing and
quality assurance activities. The FDA has proposed changes to the GMP
regulations which, if finalized, would likely increase the cost of complying
with GMP requirements. The Company believes that its manufacturing and quality
control procedures substantially conform to the requirements of FDA regulations.
In addition, the Medical Device Reporting ("MDR") regulation obligates
the Company to inform the FDA whenever there is reasonable evidence to suggest
that one of its devices may have caused or contributed to death or serious
injury, or where one of its devices malfunctions and, if the malfunction were to
recur, the device would be likely to cause or contribute to a death or serious
injury.
Labeling and promotion activities are also subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
If, as a result of FDA inspections, MDR reports or information derived
from any other source, the FDA believes the Company is not in compliance with
the law, the FDA can refuse to clear pending 510(k) Submissions; withdraw
previously cleared 510(k) Submissions; require notification to users regarding
newly found unreasonable risks; request repair, refund or replacement of faulty
devices; request corrective advertisements, formal recalls or temporary
marketing suspension; impose civil penalties; or institute legal proceedings to
detain or seize products, enjoin future violations, or seek criminal penalties
against the Company, its officers or employees. Civil penalties for FFDCA
violations may be assessed by the FDA in lieu of or in addition to instituting
legal action. Civil penalties may range up to $15,000 per violation for
violations of the FFDCA, and a maximum of $1,000,000 per proceeding. Civil
penalties may not be imposed for GMP violations, unless the violations involve a
significant or knowing departure from the requirements of the FFDCA or a risk to
public health. The FDA provides manufacturers with an opportunity to be heard
prior to the assessment of civil penalties. If civil penalties are assessed,
judicial review is available.
The Company intends to export, its products to Europe, Japan and other
foreign countries. Exports of products that have market clearance from the FDA
in the United States do not require FDA authorization for export. However,
foreign countries often require, among other things, an FDA certificate for
products for export (a "CPE"). To obtain a CPE the device manufacturer must
certify to the FDA that the product has been granted clearance in the United
States and that the manufacturing facilities appeared to be in compliance with
GMPs at the time of the last FDA inspection. The FDA will refuse to issue a CPE
if significant outstanding GMP violations exist.
International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from country
to country. Many countries also impose product standards, packaging and labeling
requirements, and import restrictions on devices. In addition, each country has
its own tariff regulations, duties and tax requirements. The Company plans to
use its distributors to assist in obtaining any necessary foreign governmental
and regulatory approvals. The Company does not currently have its products
registered or approved in any countries requiring an extensive registration or
approval process and has, therefore, not sold any products in such countries.
The Company has applied for Underwriters Laboratory, Inc. product
recognition under UL 544, Standard for Medical and Dental Equipment for the
Pacer. There can be no assurance that UL recognition for the Pacer will be
obtained. Failure to obtain UL recognition could materially and adversely limit
the Company's ability to sell the Pacer in certain areas in the United States.
To maintain "UL" status, if obtained, the Company will be subject to quarterly
inspections by Underwriters Laboratory, Inc.
The Company and its products are also subject to a variety of state and
local laws and regulations in those states or localities where its products are
or will be marketed. Use of the Company's products is subject to inspection,
quality control, quality assurance, proficiency testing, documentation and
safety reporting standards promulgated by JCAHO. Various states and
municipalities may also have similar regulations.
Manufacturers are also subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. There can be no assurance that
the Company will not be required to incur significant costs to comply with such
laws and regulations.
PRODUCT LIABILITY EXPOSURE
Manufacturers of medical devices face the possibility of substantial
liability for damages in the event that the use of their products is alleged to
have resulted in adverse effects to a patient. The Company maintains product
liability insurance with coverage limits of $1.0 million per occurrence with an
annual aggregate policy limit of $1.0 million. The Company's product liability
insurance provides coverage only for products currently manufactured and
distributed. There can be no assurance that liability claims will not exceed the
limits of such coverage or that such insurance will continue to be available on
commercially reasonable terms or at all. Furthermore, the Company does not
maintain insurance that would provide coverage for any costs or losses resulting
from any required recall of its products due to alleged defects, whether
instituted by the Company or a regulatory agency.
CHANGES IN HEALTH-CARE INDUSTRY
The health-care industry is experiencing significant pressure to reduce
costs. While the Company cannot predict what effect any proposals to contain
health-care costs may have on its business, such proposals, if enacted, could
have a material adverse effect on portions of its business, particularly its
diagnostic instruments business. In order to reduce costs and to improve
utilization of facilities, many health-care organizations have consolidated or
merged or are considering consolidating or merging their operations or portions
of their operations with the operations of other health-care organizations. The
consolidation and merging of health-care organizations has reduced and can be
expected to continue to reduce the number of potential purchasers for the
Company's products, particularly its diagnostic instruments.
LIMITATIONS ON BROKER-DEALER SALES OF COMPANY COMMON STOCK; APPLICABILITY OF
"PENNY STOCK RULES"
Federal regulations under the Securities and Exchange Act of 1934, as
amended, (the "Exchange Act") regulate the trading of so-called "penny stocks"
(the "Penny Stock Rules"), which are generally defined as any security not
listed on a national securities exchange or Nasdaq, priced at less than $5.00
per share and offered by an issuer with limited net tangible assets and
revenues. In addition, equity securities listed on Nasdaq which are priced at
less than $5.00 are deemed penny stocks for the limited purpose of Section
15(b)(6) of the Exchange Act. Therefore, during the time in which the Common
Stock is quoted on the Nasdaq SmallCap Market and is priced below $5.00 per
share, trading of the Common Stock is subject to the provisions of Section
15(b)(6) of the Exchange Act which make it unlawful for any broker-dealer to
participate in a distribution of any penny stock without the consent of the
Securities and Exchange Commission if, in the exercise of reasonable care, the
broker-dealer is aware of or should have been aware of the participation of a
previously sanctioned person. In such event, it may be more difficult for
broker-dealers to sell the Common Stock and purchasers of the shares of Common
Stock offered hereby may have difficulty in selling their shares in the future
in the secondary trading market.
In the event that the Company's Common Stock is delisted from the
Nasdaq SmallCap Market and the Company fails other relevant criteria, trading,
if any, of the Common Stock would be subject to the full range of the Penny
Stock Rules. Under these rules, broker-dealers must take certain steps prior to
selling a "penny stock," which steps include: (i) obtaining financial and
investment information from the investor; (ii) obtaining a written suitability
questionnaire and purchase agreement signed by the investor; and (iii) providing
the investor a written identification of the shares being offered and in what
quantity. If the Penny Stock Rules are not followed by the broker-dealer, the
investor has no obligation to purchase the shares. Accordingly, delisting from
the Nasdaq SmallCap Market and the application of the comprehensive Penny Stock
Rules may make it more difficult for broker-dealers to sell the Company's Common
Stock and purchasers of the shares of Common Stock offered hereby may have
difficulty in selling their shares in the future in the secondary trading
market.
POSSIBLE DILUTIVE EFFECT OF OUTSTANDING OPTIONS, WARRANTS, CONVERTIBLE
DEBENTURES AND PREFERRED STOCK
As of July 25, 1996, there were up to 1,296,028 shares of Common Stock
reserved for issuance upon the exercise of stock purchase warrants or options or
the conversion of Debentures and Preferred Stock. To the extent the trading
price of the Company's Common Stock at the time of exercise or conversion of any
such warrants, options, Debentures or Preferred Stock exceeds the exercise or
conversion prices, any such exercise or conversion will have a dilutive effect
on the Company's shareholders.
The Company's Articles of Incorporation, as amended, authorize the
issuance of up to 14,285,714 shares of Common Stock, of which 1,693,234 shares
were outstanding on July 25, 1996. The Company's Board of Directors has the
authority to issue additional shares of Common Stock and to issue options and
warrants to purchase shares of the Company's Common Stock without shareholder
approval.
AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK
HealthWatch is authorized to issue up to 1,428,571 shares of Preferred
Stock. The Board of Directors has the power to establish the dividend rates,
liquidation preferences, voting rights, redemption and conversion terms and
privileges with respect to any series of Preferred Stock. The issuance of any
shares of Preferred Stock having rights superior to those of HealthWatch's
Common Stock may result in a decrease in the value or market price of the Common
Stock and could further be used by the Board as a device to prevent a change in
control of HealthWatch. Holders of Preferred Stock may have the right to receive
dividends, certain preferences in liquidation and conversion rights. There
currently are 200,000 outstanding shares of Series A Preferred Stock.
MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED SHAREHOLDER MATTERS
The number of record holders of the Company's Common Stock on July 24,
1996, was 719. The high and low sale prices as reported on the Nasdaq Small Cap
Market are shown in the table below. These quotations represent prices between
dealers, and do not include retail markups, markdowns or commissions.
QUARTER ENDED HIGH LOW
1994
September 30 $14 $7.875
December 31 10.50 7
1995
March 31 2.84375 2.625
June 30 3.28125 1.96875
September 30 4.8125 2.1875
December 31 4.375 2.1875
1996
March 31 3.9375 2.1875
June 30 4.188 2.00
The Company has never paid a cash dividend on its Common Stock. The
payment by the Company of dividends, if any, in the future rests within the
discretion of its Board of Directors and will depend, among other things, upon
the Company's earnings, capital requirements and financial condition.
USE OF PROCEEDS
The Company will not receive any of the proceeds of the sale of the
Common Stock by the Selling Shareholders. The Company may, however, receive
proceeds upon the exercise of Warrants held by the Selling Shareholders
representing the rights to acquire up to 280,000 shares of Common Stock, which
Warrants must be exercised prior to the sale pursuant to this offering by the
Selling Shareholders of the underlying shares of Common Stock. The net proceeds,
if any, from the exercise of the Warrants will be used by the Company primarily
for working capital purposes, including the purchase of raw materials required
to build product inventory for the first IV product, marketing and sales
expenses related to the introduction of this product and product development.
The Company estimates that it needs approximately $800,000 of additional debt or
equity capital to sustain its operations during the next 12 months. In addition
to the $800,000 required to sustain operations, the Company estimates that it
will need to obtain from $800,000 to $1,400,000 of additional working capital to
implement its marketing plan for the Pacer and to provide adequate working
capital to fund a rapid increase in product sales. In the event that the Company
is unable to raise additional capital, it will be required to defer producing IV
or other products, to sell certain assets or enter into joint ventures with or
grant licenses to other companies with respect to one or more of its products
and/or further reduce its operations in order to sustain operations. There can
be no assurance that the Company could, if it were required to do so to sustain
operations, sell any such assets or enter into any such joint venture or grant
any such license, if at all, on terms acceptable to the Company.
The Company's estimate regarding the need for additional capital to
fund its operations for the next twelve months is based upon various assumptions
regarding the working capital that will be required to introduce the Pacer,
overall working capital requirements and revenues from product sales, including
sales of the Company's existing products as well as the Pacer. There can be no
assurance that these assumptions will prove to be correct. In the event that
they are not correct, the Company may be required to obtain additional capital,
delay certain product development and sales and marketing activities, sell
certain assets or enter into one or more joint ventures with other companies
and/or reduce its level of operations.
PROFORMA FINANCIAL STATEMENTS
On September 13, 1993, HealthWatch purchased 100% of the common stock
of Metamed, Inc. The total purchase price was $755,724 and consisted of 89,286
shares of HealthWatch Common Stock valued at $700,000 in exchange for $9,819 of
property and equipment, $3,406 of intangible assets, net of $33,081 of accounts
payable assumed and $55,724 of professional fees incurred.
HealthWatch accounted for the acquisition under the purchase method
whereby the assets and liabilities of Metamed are recorded at their net book
value, which approximated fair market value as of the date of acquisition as
estimated by management. The $775,580 excess purchase price over the fair market
value of tangible assets and liabilities acquired has been identified as
Technology/Product Development acquired and was expensed at the date of
acquisition.
Summarized below are the unaudited condensed and proforma statements of
operations as if the Metamed acquisition had taken place at the beginning of the
year ended June 30, 1994. All adjustments, which in the opinion of management,
are necessary for a fair proforma presentation have been made in the following
proforma consolidated financial statements. These financial statements are
intended to present consolidated results of operations for the period presented.
Had the acquisition actually taken place at the beginning of the period,
operating results may have differed from the proforma results posted below and
accordingly, the proforma results are not intended to be indicative of future
results.
YEAR ENDED JUNE 30, 1994
ACTUAL PROFORMA
Sales $4,070,146 $4,070,146
Cost of sales 2,951,490 2,951,490
Operating expenses 3,119,615 3,120,407
---------- ----------
Loss from continuing operations (2,000,959) (2,001,751)
Other income (expense) (839,654)(1) (839,654)(1)
----------- -----------
Loss before extraordinary item (2,840,613) (2,841,405)
Extraordinary item - gain from
extinguishment of debt 24,328 24,328
---------- ----------
Net loss $(2,816,285) $(2,817,077)
=========== ===========
Net loss per share $ (10.30) $ (9.80)
======= ======
Weighted average number of shares 273,274 288,322
(1) Includes an expense of $775,580 relating to the intangible assets
acquired in connection with the Metamed acquisition which were expensed
at the time of the acquisition as the development of the Metamed products
had not been completed at the time of the acquisition.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In recent years, the markets in which the Company participates have
experienced significant changes and a period of uncertainty due to proposed
changes in health-care administration in the United States and efforts by
health-care organizations to reduce their operating costs and the cost of
health-care in general. As a result, the Company has focused its products in the
hospital marketplace in anticipation of lower sales directly to physicians. The
Company believes that the major changes which have been introduced to the
health-care industry will place greater emphasis on lower-cost products. While
medical standards for safety and effectiveness are expected to remain strong,
costs are expected to be a deciding factor on health-care purchases.
HealthWatch has incurred losses from operations in each of its last
three fiscal years and nine months. Due to the significantly better margins
anticipated for its IV products than for its diagnostic products, the Company's
primary focus is on the development of its IV business
RESULTS OF OPERATIONS
FIRST NINE MONTHS OF FISCAL 1996 COMPARED TO FIRST NINE MONTHS OF
FISCAL 1995. The following table compares the results of operations for the
first nine months of fiscal 1996 and the first nine months of fiscal 1995 to
present a comparative basis for the analysis of the differences in operating
results for those periods.
<TABLE>
<CAPTION>
Nine Months Ended March 31,
------------------------------------------- 1996 vs 1995
1996 1995 Increase (Decrease)
------------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
Product sales $ 1,531,833 $ 2,953,238 ($1,421,405) (48.1%)
Product cost of sales 1,173,462 2,109,387 (935,925) (44.4)
----------- -----------
Gross profit 358,371 843,851 (485,480) (57.5)
Selling, general & administrative 1,030,246 1,362,257 (332,011) (24.4)
Research & development 263,200 424,388 (161,188) (38.0)
Depreciation & amortization 261,596 280,923 (19,327) (6.9)
--------- ---------
Total operating costs & expenses 1,555,042 2,067,568 (512,526) (24.8)
---------- ----------
Loss from continuing operations (1,196,671) (1,223,717) (27,046) (2.2)
Other income (expenses):
Interest income 7,998 4,515 3,483 77.1
Interest expense (50,756) (51,954) (1,198) (2.3)
Miscellaneous 10,102 0 10,102 N/M
----------- ------------
Total other income (expenses) (32,656) (47,439) (14,783) (31.2)
------------ -------------
Extraordinary Item 0 (13,639) (13,639) (100)
------------ -------------
Net Loss ($1,229,327) ($1,284,795) ($55,468) (4.3%)
============ ============
</TABLE>
Revenues declined 48.1% during the 1996 first nine months, compared to
the 1995 period, primarily due to a decline in product sales. The Company
believes that product sales continue to be depressed as a result of the
Company's lack of adequate working capital which has adversely affected its
level of sales as the Company has not been able to support both the development
of its new IV product and selling efforts and enhancements to its existing
products. In addition, the Company believes that uncertainty in the medical
community regarding the reimbursement effects of health-care reforms;
consolidations of hospital and other health-care institutions resulting in fewer
customers for the Company's diagnostic products and delays in making purchase
commitments by institutions engaged in merger or consolidation discussions; and
competitive pressure on product prices also contribute to depressed sales.
Completion of the Company's first IV product was delayed by the
Company's decision to redesign the layout for this product in order to be able
to use a different microprocessor chip that is more readily available to the
Company. The decision to incorporate a different microprocessor chip was
necessitated by the Company's inability to obtain the original microprocessor
chip in accordance with previous commitments from the distributor for this chip
and because the distributor was unwilling to provide adequate assurance
regarding future deliveries of the chip.
Cost of products sold were 44.4% lower in the nine-month period ended
March 31, 1996, compared to the similar fiscal 1995 period, due primarily to
lower sales and to reduced operating costs. Gross margin was 23.4% in the
nine-month period ended March 31, 1996, compared to 28.6% for the similar fiscal
1995 period. The lower gross margin in the nine-month fiscal 1996 period was
primarily due to the decreased sales revenues during the period.
Selling, general and administrative expenses as a percent of sales were
67.3% in the nine-month period ended March 31, 1996, compared to 46.1% in the
prior year period. This increase was due primarily to the lower sales level and
to planned expenditures associated with the introduction of the new IV product.
Research and development expenses decreased 38.0% in the fiscal 1996
period compared to the fiscal 1995 period as development efforts on the
Company's IV controller have declined as the Company's efforts with the new IV
product shift to production of the initial units.
1995 COMPARED TO 1994. The following table compares the results of
operations for fiscal 1995 and fiscal 1994 to present a comparative basis for
the analysis of the differences in operating results for those periods.
<TABLE>
<CAPTION>
------------------------------------------- 1995 vs 1994
1995 1994 Increase (Decrease)
------------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
Product sales $3,516,252 $4,070,146 ($553,894) (13.6%)
Product cost of sales 2,399,543 2,951,490 (551,947) (18.7)
--------- ---------
Gross profit 1,116,709 1,118,656 (1,947) (0.2)
Selling, general & administrative 2,105,148 2,513,458 (408,310) (16.2)
Research & development 499,099 201,713 297,386 147.4
Depreciation & amortization 355,701 404,444 (48,743) (12.1)
---------- ----------
Total operating costs &
expenses 2,959,948 3,119,615 (159,667) (5.1)
---------- ----------
Loss from continuing
operations (1,843,239) (2,000,959) (157,720) (7.9)
Other income (expenses):
Interest income 4,546 14,084 (9,538) (67.7)
Interest expense (76,943) (88,976) (12,033) (13.5)
Metamed Product
Development -- (775,580) (775,580) (100.0)
Gain on sales of assets -- 14,298 (14,298) (100.0)
Miscellaneous 85,182 (3,480) 88,662 N/M
------------- -------------
Total other income
(expenses) 12,785 (839,654) (852,439) (101.5)
------------ ------------
Loss before
extraordinary item (1,830,454) (2,840,613) (1,010,159) (35.6)
Extraordinary item:
Gain from reduction
in debt obligation 61,603 24,328 37,275 153.2
------------- -------------
Net loss ($1,768,851) ($2,816,285) ($1,047,434) (37.2%)
============ ============
</TABLE>
Revenues declined 13.6% during 1995 compared to 1994, primarily due to
a decline in product sales. The Company believes that product sales continue to
be depressed as a result of uncertainty in the medical community regarding the
reimbursement effects of health-care reforms; consolidations of hospital and
other health-care institutions resulting in fewer customers for the Company's
diagnostic products and delays in making purchase commitments by institutions
engaged in merger or consolidation discussions; and competitive pressure on
product prices. In addition, the Company believes that its lack of adequate
working capital has adversely affected its level of sales as the Company has not
been able to adequately support selling efforts and enhancements to its existing
products. While bookings of product orders increased during the first quarter of
fiscal 1995, compared to the first quarter of fiscal 1994, bookings of new
product orders declined in the second, third and fourth quarters of fiscal 1995,
compared to the second, third and fourth quarters of fiscal 1994. At June 30,
1994, the backlog of booked but not shipped orders was $238,000 compared to
$50,750 at June 30, 1995. During the second quarter of fiscal 1995, the Company
implemented actions to improve its material procurement practices which resulted
in the reduction in the backlog of booked but not shipped orders. Completion of
the Company's first IV product has been delayed, most recently by the Company's
decision to redesign the layout for this product in order to be able to use a
different microprocessor chip that is more readily available to the Company. The
decision to incorporate a different microprocessor chip was necessitated by the
Company's inability to obtain the original microprocessor chip in accordance
with previous commitments from the distributor for this chip and because the
distributor was unwilling to provide adequate assurance regarding future
deliveries of the chip. The Company expects to begin limited shipments of its
new IV controller product in the second quarter of fiscal year 1996.
Costs of products sold during fiscal 1995 were 18.7% lower than in
fiscal 1994, due primarily to the lower levels of sales. Gross margins were
31.8% and 27.5% for fiscal 1995 and fiscal 1994, respectively. The higher gross
margin for the 1995 period was primarily due to the lower cost of sales due to
the sale of the Telemed ECG software and the Company's efforts to reduce its
operating costs.
Selling, general and administrative expenses as a percent of sales were
59.9% in fiscal 1995 compared to 61.8% in the prior year. This decrease was due
primarily to costs incurred in fiscal 1994 in connection with the relocation of
the Company's corporate offices to Vista, California. While the Company has made
substantial reductions in the number of personnel in response to the lower sales
level, it does not expect significantly lower selling, general and
administrative expenses in fiscal 1996 due to planned expenditures associated
with the introduction of the new IV product.
Research and development expenses increased 147.4% in fiscal 1995
compared to fiscal 1994 as development efforts on the Company's IV controller
increased.
The decrease in the Company's other expense in fiscal 1995 compared to
fiscal 1994 was a result primarily of the Company's acquisition on September 13,
1993, of Metamed, Inc. The $775,580 of excess purchase price over the fair
market value of tangible assets and liabilities was charged to expense in the
first quarter of fiscal 1994, as the development of Metamed products had not
been completed at the time of the acquisition.
1994 COMPARED TO 1993. The following table compares the results of
operations for fiscal 1994 and fiscal 1993 to present a comparative basis for
the analysis of the differences in operating results for those periods.
<TABLE>
<CAPTION>
1994 vs 1993
1994 1993 Increase (Decrease)
------------------ ---------------- --------------------------------
<S> <C> <C> <C> <C>
Product sales $4,070,146 $6,094,862 ($2,024,716) (33.2%)
Product cost of sales 2,951,490 3,320,822 (369,332) (11.1)
---------- ----------
Gross profit 1,118,656 2,774,040 (1,655,384) (59.7)
Selling, general &
administrative 2,513,458 3,573,115 (1,059,657) (29.7)
Depreciation & amortization 404,444 490,145 (85,701) (17.5)
Research & development 201,713 281,918 (80,205) (28.4)
--------- ---------
Total operating costs &
expenses 3,119,615 4,345,178 (1,225,563) (28.2)
---------- ----------
Loss from continuing
operations (2,000,959) (1,571,138) 429,821 27.4
Other income (expense):
Metamed Product
Development costs (775,580) 0 (775,580) N/M
Gain on sale of Investment 84,799 0 84,799 N/M
Interest income 14,084 12,302 1,782 14.5
Interest expense (88,976) (80,533) 8,443 10.5
Miscellaneous (3,480) 13,467 (16,947) (125.8)
Loss on disposal of fixed
assets (70,501) 0 (70,501) N/M
--------- -------
Total other income
(expense) (839,654) (54,764) 784,890 1433.2
Loss from continuing
operations before
discontinued operations
and extraordinary item (2,840,613) (1,625,902) 1,214,711 74.7
Discontinued operations:
Income from discontinued
operations of medical
services segment 0 186,797 (186,797) (100.0)
Gain on sale of medical
services segment 0 288,697 (288,697) (100.0)
---------- ----------
Loss before
extraordinary Item (2,840,613) (1,150,408) 1,690,205 146.9
Extraordinary item-gain from
extinguishment of debt 24,328 102,433 (78,105) (76.2)
----------- -----------
Net loss ($2,816,285) ($1,047,975) $1,768,310 168.7%
============ ============
</TABLE>
The decrease of $2,024,716 or 33.2% in product sales in 1994 compared
to 1993 is primarily due, the Company believes, to the continued uncertainty in
the medical community regarding the effects of the health care reform proposed
by the Administration, particularly with respect to the Company's business,
uncertainty with how the proposals may affect reimbursement for diagnostic
procedures, as well as to generally lower sales due to personnel changes,
reductions in list prices for many of the Company's products throughout fiscal
1994 and discontinuation of sales of licensed products produced by other
companies. In December 1993, the Company hired a new Vice President of Sales and
Marketing in an effort to improve sales of the Company's products and to better
position the Company for the introduction of its first Metamed infusion therapy
products. The Company believes that its sales for fiscal 1994 were adversely
affected by uncertainties that existed within its sales and marketing group
during the period from the time it determined to seek new leadership for this
group until the new Vice President of sales and marketing was hired and began
working for the Company. Bookings of new product orders increased by
approximately 34 % during the six months ended June 30, 1994, compared to the
first six months of the fiscal year. However, due to difficulties in raw
materials procurement related to the Company's relocation during the first six
months of the fiscal year, a significant number of booked orders were not
shipped by the end of the fiscal period.
Cost of product sales, which resulted in a gross margin of 27.5% in
fiscal 1994 (compared with 45.5% in 1993) declined $369,332 or 11.1% due to the
reduction of manufacturing expenses to support the lower level of sales. The
lower gross margins in the fiscal 1994 period were primarily due to the
significantly lower sales revenues which were not sufficient to support certain
relatively fixed costs, costs associated with amending various of the Company's
manufacturing processes and documentation to better assure compliance with the
"good manufacturing practices" of the U.S. Food and Drug Administration, and
increased price competition which caused the Company to reduce the list prices
for several of its products during fiscal 1994.
Selling, general and administrative expenses decreased $1,059,657 or
29.7%, in fiscal 1994 compared to 1993, due primarily to lower head counts and
reduction of certain administrative and selling expenses as a result of the
lower level of sales and decreases in commission expenses also as a result of
the lower level of sales.
Depreciation and amortization decreased in fiscal 1994 by $85,701 or
17.5%, compared to 1993, primarily due to the retirement of property and
equipment in connection with the sale in the third quarter of fiscal 1993 of the
medical services segment of the Company's business and the completion in fiscal
1993 of amortization of certain intangibles relating to the Life Sciences
acquisition.
Research and development expenses decreased $80,205 or 28.4% in fiscal
1994 compared to 1993, as product developments were limited to design
improvements to one product line and development of the IV controller.
Other income (expense) includes expenses of $775,580 relating to the
value of the intangible assets acquired in connection with the Metamed
acquisition in the first quarter of fiscal 1994 which were expensed at the time
of the acquisition, as the development of the products had not been completed at
the time of the acquisition, a loss of $57,430 recognized in connection with the
sale of a building which originally had been used in connection with the medical
services business sold in 1989, a loss of $10,227 on sale of leasehold
improvements in the Company's former Broomfield, Colorado facilities and income
of $84,799 relating to the sale of common stock of Discovery Technologies, Inc.
Interest income increased in fiscal 1994, compared to 1993, due to interest paid
on the notes received as part of the purchase price for the medical services
business sold during the third quarter of fiscal 1993. Interest expense
increased in fiscal 1994, compared to 1993, due to interest paid on the
Company's 10% Convertible Senior Debentures issued in the second quarter of
fiscal 1993.
The Company's net loss increased by $1,768,310 in fiscal 1994 compared
to 1993 due primarily to the lower level of sales, lower gross margins and the
$775,580 expense relating to the intangible assets acquired in connection with
the Metamed acquisition as described above and direct (approximately $110,000)
and indirect costs incurred in connection with the move of the Company's
corporate offices from Broomfield, Colorado to Vista, California.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had $328,301 of cash and accounts
receivable. Due to the Company's operating losses, it has been required to raise
additional debt and equity capital to fund its operations. Capital expenditures
during this period have been limited to routine capital purchases. In August
1995, the Company completed the sale of 148,712 Units of its securities, at a
purchase price of $7.00 per Unit. Each Unit consisted of four shares of Common
Stock and two redeemable Common Stock Purchase Warrants. During the first nine
months of fiscal 1996, the Company also issued an aggregate of 134,084 shares of
its Common Stock in payment of trade accounts payable and for services.
The Company believes it needs to raise approximately $800,000 of
additional working capital to sustain operations during the next twelve months.
While not required to sustain operations, the Company believes it should raise
an additional $800,000 - $1,400,000 of such capital to better fund the sales and
marketing expenses for the roll-out of the new IV product, to continue the
development of additional IV products and for general working capital purposes
during the next twelve months.
In the event that the Company is unable to raise additional capital, it
will be required to defer shipment of the initial IV products and/or to sell
certain assets or enter into joint ventures with or grant licenses to other
companies with respect to one or more of its products in order to sustain
operations. There can be no assurance that the Company could, if it were
required to do so to sustain operations, sell any such assets or enter into any
such joint venture or grant any such license, if at all, on terms acceptable to
the Company. If the Company is unable to obtain additional working capital, it
will be necessary for the Company to attempt to further reduce operating
expenses and/or curtail certain of its operations and product development
activities.
BUSINESS
INTRODUCTION
HealthWatch develops, manufactures and markets medical products,
including the Pacer, a new infusion therapy ("IV") device, Cambridge
electrocardiograph stress test systems and Life Sciences vascular diagnostic
systems. The Company's primary focus since 1993 has been on the development of
the Pacer. The Pacer, which is less expensive, smaller and lighter and easier to
use than most competing infusion therapy devices, has recently been introduced
to the marketplace.
Prior to the introduction late in the 1980s of diagnostic-related
groups ("DRGs"), health-care providers were generally compensated for their
services on a cost-plus basis. In this environment, product features and
technology drove product purchase decisions, even if the benefits derived from
the added features and higher technology did not justify the higher cost. With
the advent of DRGs and managed care, third-party payors shifted their payment
policies toward fixed fees for services rendered or capitated payment
arrangements whereby providers were reimbursed a fixed amount for patients
serviced by their organizations. In today's health-care environment, providers
are required to focus on cost, to carefully match patient benefits with the cost
of the services provided.
HealthWatch's strategy is to develop and market medical products
designed to improve the cost-effective delivery of high-quality health care. The
Pacer, the Company's first infusion therapy product, enables hospitals,
long-term care facilities, home-care agencies and others to maintain the quality
of the IV therapy they provide while also reducing significantly the cost of
such services. These cost savings are achieved both due to the Pacer's
substantially lower price than the price of most competing IV systems and
because the Pacer can be used with generic IV tubing which usually is
substantially less expensive than proprietary dedicated IV tubing required to be
used with most competing systems.
Markets for the Company's Cambridge and Life Services diagnostic
products have been adversely affected by efforts to contain health-care costs as
well as by the efforts of many hospitals and other health-care institutions to
reduce their costs by consolidating operations with the operations of other
institutions. This consolidation has resulted in fewer customers for these
diagnostic products and for delays in obtaining purchase orders from
institutions which are evaluating possible consolidations. In contrast, the
Company believes that its IV products will benefit from the health-care
industry's focus on reducing costs, as these products are less expensive and
easier to use than most competing products.
References herein to "HealthWatch" or the "Company" include HealthWatch
and its consolidated subsidiaries and their predecessors unless the context
indicates otherwise. HealthWatch was incorporated in the state of Minnesota in
1983.
BUSINESS SEGMENTS
HealthWatch's business prior to the sale of its medical services
businesses in February and March 1993, generally could be divided into two
business segments: medical products and medical services. Revenues and operating
profits (losses) before allocation of certain corporate and other expenses for
both of these segments for the past three fiscal years and nine months ended
March 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Nine Months
Ended March 31, Year Ended June 30,
---------------------------------- ---------------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Medical Products
Cardiology $ 176,299 $ 645,595 $ 610,623 $ 863,904 $ 1,301,974
Peripheral Vascular $ 292,404 $ 1,017,927 $ 1,206,772 $ 1,409,528 $ 2,417,951
Supplies & Technical
Services $ 1,063,130 $ 1,289,711 $ 1,698,857 $ 1,796,714 $ 2,374,937
-------------- ---------------- -------------- --------------- --------------
TOTAL $ 1,531,833 $ 2,953,238 $ 3,516,252 $ 4,070,146 $ 6,094,862
Medical Services:
Management $ 0 $ 0 $ 0 $ 0 $ 437,894
Billing $ 0 $ 0 $ 0 $ 0 $ 239,454
------------- -------------- ------------- -------------- --------------
TOTAL $ 0 $ 0 $ 0 $ 0 $ 677,348
Operating (Loss)
Medical Products $(1,196,671) $(1,223,717) (1,843,239) (2,000,959) (1,344,523)
Medical Services $ 0 $ 0 $ 0 $ 0 $ 186,797
</TABLE>
For the nine months ended March 31, 1996, the Company reported a
decline in revenues of $469,296 for cardiology products, $725,523 for peripheral
vascular products, and $226,586 for supplies and technical services when
compared to the first nine months of fiscal 1995. For the year ended June 30,
1995, the Company reported a decline in revenues of $253,281 for cardiology
products, $202,756 for peripheral vascular products and $97,857 for supplies and
technical services when compared with fiscal 1994. For the year ended June 30,
1994, the Company reported a decline in revenues of $438,070 for cardiology
products, $1,008,423 for peripheral vascular products and $578,223 for supplies
and technical services when compared with fiscal 1993. For the year ended June
30, 1993, product revenues declined $1,145,244 compared to the year ended June
30, 1992. The Company attributes the reduction in revenues for its cardiology
and peripheral vascular products primarily to a general slowdown in the
purchases of capital medical devices due to the uncertainty in the market for
such products caused by proposed health-care reforms and efforts to reduce
health-care costs. In addition the Company's revenues have been adversely
affected by the lack of adequate working capital, changes in sales personnel, as
well as the need to reduce prices for its products to meet price reductions by
competitors, again , the Company believes, due to the softness in the markets
for its products. Revenues from supplies and technical services are related to
the placement of new cardiology and peripheral vascular products.
Foreign sales accounted for $482,747, $1,077,707, $1,318,233,
$1,228,205 and $1,529,752 of the Company's medical product revenues during the
first nine months of fiscal 1996 and 1995 and fiscal 1995, 1994 and 1993,
respectively. The revenues from the international market are generated by
distributor sales and a wholly owned subsidiary, Cambridge Medical Equipments
LTD., in England. Cambridge Medical Equipments LTD. accounted for revenues of
$271,115, $427,135, $561,364, $476,856 and $628,183 for the nine months ended
March 31, 1996 and 1995 and for the three years ended June 30, 1995, 1994 and
1993, respectively. International product sales are primarily through
distributors. HealthWatch currently has approximately 42 distributors worldwide.
For additional information regarding the Company's business segments see Note 18
of the Notes to the Consolidated Financial Statements for the years ended June
30, 1995 and 1994. Neither HealthWatch nor any of its affiliates does business
with the government of Cuba or any person or affiliate located in Cuba.
MEDICAL PRODUCTS
HealthWatch's goal has been to build a medical products business, with
an emphasis on cardiac and vascular diagnostic products and IV instrumentation
products for hospital, physician and home care use. HealthWatch's first
cardiology acquisition was the acquisition in June 1990 of the assets of
Telemed, a 20-year old electrocardiograph and ECG overread service business.
HealthWatch considered Telemed's primary value to be its ECG software-based
analysis program which had been validated by a database of over 20 million
ECG'S. During January 1995, the Company sold the Telemed ECG analysis program to
an unrelated party for $75,000. The Company retained a license to use the
program with its Cambridge products.
HealthWatch's second cardiology acquisition was the acquisition in
December 1990, of Cambridge Medical Instruments (located in the United States)
and Cambridge Medical Equipments (located in the United Kingdom). Cambridge,
founded in 1911 by Sir Horace Darwin, son of the naturalist Charles Darwin, was
the first company to manufacture electrocardiograph diagnostic equipment.
HealthWatch considered the primary value of the Cambridge acquisition to be the
Cambridge name and the Cambridge exercise stress test product line.
In October 1990, HealthWatch acquired Life Sciences, a 16-year old
company engaged in the design, manufacture and marketing of Doppler and
ultrasound imaging systems for the noninvasive assessment of peripheral vascular
diseases. Life Sciences has an installed base in excess of 2,850 systems.
HealthWatch considered Life Sciences' primary value to be its established
product line and strong name recognition in the hospital and vascular laboratory
markets.
In September 1993, HealthWatch acquired Metamed, a company formed in
1992 to develop a line of IV therapy and drug delivery devices. HealthWatch
considered Metamed's primary value to be its proprietary technology.
Cardiac and peripheral vascular diseases represent the first and third
causes, respectively, of death in the United States. Sales of products and
services for both of these market segments, which have shown significant growth
during the last 15 to 20 years, showed limited growth in more recent years due,
HealthWatch believes, to general uncertainties in the health-care industry as a
result of proposed reform of the United States' health-care delivery system and
overall constraints on health-care costs.
The IV instrumentation marketplace has undergone substantial change
during the past three to four years due, in part, to the use of newer
pharmaceuticals which require instrumented controls to insure precise delivery
of the drugs, an increase in the desire to provide for concurrent intravenous
delivery of different drugs and a rapid increase in the use of IV instruments in
connection with the care of patients in their homes.
GLOSSARY OF TERMS
CHANNEL (single, three and multi) - Format for recording ECG test data,
a channel representing information from one lead. A single channel ECG machine
prints information from one lead at a time, whereas a three or multichannel
machine prints information from three or multiple leads, respectively, at a
time. Each lead represents a position on the patient from which data is
gathered.
DOPPLER - Measurement by sound or light wave length.
ELECTROCARDIOGRAPH (ECG) - A method of recording the magnitude and
direction of electrical activity of heart cells during each cardiac cycle. Data
is gathered by leads from up to 12 different locations on the patient's body.
ECG OVERREAD SERVICE - A service that provides for a second
reading/interpretation of ECG tests. ECG'S may be transmitted electronically via
modems to a central location for computerized overread/interpretation.
EXERCISE STRESS TESTING - Also called Graded Exercise Testing (GXT), is
the recording of a patient's ECG under a controlled exercise environment.
EXTREMITIES or limbs - Upper extremities include the arms, forearms,
wrists and hands and the lower extremities include the thighs, legs, ankles and
feet.
INFRARED - Invisible heat or light rays having wavelengths longer than
those of red light.
IV - Intravenous delivery of fluids and pharmaceuticals.
OPHTHALMIC ARTERY - Artery supplying blood to the eyes and adjacent
structures.
OCULAR - Pertaining to the eye.
PERIPHERAL VASCULAR - All blood vessels other than those of the heart.
PULMONARY EMBOLI - Blood clots in blood vessels in the lungs.
THROMBOSIS - Development or presence of a blood crust, clot or plug in
one of the cavities of the heart or in a blood vessel.
ULTRASOUND - A form of energy consisting of sound-like vibrations or
waves of high frequency.
VASCULAR - Pertaining to or involving blood vessels (arteries and
veins).
IV PRODUCTS. The concept of automated intravenous delivery was
developed in the early 1970s with the introduction of drop counting IV delivery
systems which relied on counting drops of assumed volume for system accuracy. IV
delivery systems have evolved into sophisticated computer controlled controller
and pump systems. Controller systems rely on gravity to provide the delivery
force whereas pump systems use either a syringe pump or peristaltic mechanism to
force the fluid to the patient.
The Company has adopted the concept of drop counting systems and
applied computer technology to develop a system which determines the flow rate
and volume based on the input through a flow sensor. The Company's measurement
system requires substantially less power than competing systems, which enables
the required electronics and controls to be incorporated into the flow sensor
itself, resulting in smaller and lighter systems as well as systems that the
Company believes will be easier to use and less costly than controller and pump
systems currently being marketed. In addition, the Company's devices are
designed to be used with a variety of IV sets, including most 10, 15, 20 and 60
drop sets, the standard drop sizes for IV tubing used in the United States,
compared to other devices which generally can be used only with proprietary IV
sets designed for the particular controller or pump being used. The ability to
be used with a variety of sets is also expected to make the Company's system
easier to use and to lower total costs incurred in providing IV therapy to
patients.
The Pacer, the Company's first IV product, a controller, which was
approved for marketing by the FDA in April 1994, has recently been introduced
and initial marketing efforts commenced. The Pacer's list price is $1,200,
compared to competing single channel products, normally IV pumps, which sell for
in excess of $2,000 for products with features similar to those for the Pacer to
up to $6,500 or more for more complicated pump products with specialized
operating features. The Pacer may be used with a variety of IV sets, including
generic sets which generally sell for significantly less than proprietary sets
which normally must be used with competing IV pump products. The use of generic
IV sets can save users from $1.25 to $9.25 per IV set used. It is not unusual
for hospitals to use annually from 140 to 200 sets per IV instrument.
HealthWatch believes that there are more than 1,000,000 IV controllers
and pumps currently being used in the U.S. and that approximately 200,000 IV
instruments are sold annually in the U.S. and that the international market is
equal in size to the U.S. market. The Company intends to market the Pacer based
on its ease of use and the potentially significant cost savings which users of
the Pacer may recognize, both due to the lower cost for the Pacer and the
ability to use lower-priced IV sets.
CARDIOLOGY PRODUCTS. ECG equipment provides a method of recording the
magnitude and direction of the electrical activity of the heart cells during
each cardiac cycle. By measuring and identifying electrical activity intervals,
axes and amplitudes of the wave forms, detailed information about cardiac
disease and the functional process of the heart can be derived.
ECG equipment is found in hospitals, clinics and physicians' offices,
as well as ambulances. Recordings are routinely taken by nurses, technicians and
physicians. In most situations, final ECG interpretations must be performed by
physicians.
ECG tests conducted while patients are resting are augmented in certain
situations by other tests, including exercise stress testing. Under induced
stress, a patient may unmask abnormalities not detected at rest with a standard
ECG. However, the ready availability of the ECG and its ease of use and low cost
make it part of most diagnostic workups for cardiac patients. The ECG is one of
the most frequently performed tests in medicine.
HealthWatch's cardiology products include the Cambridge 6600 series and
6900 series lines of ECG and cardiac stress test systems which include
proprietary systems developed by Cambridge and systems manufactured by other
companies. The Cambridge 6900 is a stand-alone ECG stress test system with an
available treadmill or ergometer for cardiac stress test analysis.
The Cambridge MC6000 series of electrocardiograph equipment offers a
wide range of options, from the basic 12-lead system (MC6600) to an advanced
exercise testing configuration (MC6900A). The Telemed software has been migrated
to the Cambridge MC6000 series to complete this product line. Cambridge ECG
equipment sells from $4,500 to $13,500.
HealthWatch sold the Telemed interpretive software in January 1995.
HealthWatch retained a license to use the Telemed software with its Cambridge
products.
PERIPHERAL VASCULAR PRODUCTS. While peripheral vascular disease is
generally less likely to produce catastrophic consequences than is cardiac
disease, it may cause significant disability and lifestyle restrictions as well
as death. Vascular disease diagnosis and management has historically been done
by vascular surgeons. With the aging of the U.S. population, a greater awareness
of vascular disease in general, and better surgical and medical management
options, more medical specialists are becoming involved in the diagnosis and
treatment of vascular disease. The capability and sophistication of the
equipment needed to diagnose peripheral vascular disease varies greatly from the
needs of the primary-care physician who may only be attempting to determine
whether or not a patient has symptoms of peripheral vascular disease to the
needs of the vascular laboratory which may be trying to establish the exact
location and severity of the disease.
HealthWatch currently markets two products under the "Life Sciences"
brand name. First, the Modular Vascular Lab (MVL), a computer-controlled
instrument which, through the use of various plug-in modules, can perform a wide
range of vascular diagnostic studies. During fiscal 1992, the Company
re-designed the MVL to simplify the options available and to reduce the cost of
this equipment. The re-designed MVL is referred to as the "MVL Classic."
The MVL produces detailed color reports and is easily operated with a
remote hand controller which allows the vascular technician to concentrate on
the patient rather than on operation of the MVL. The modular concept permits the
customer to purchase only the diagnostic testing modalities desired and to add
new modalities at any time. The MVL includes:
* MVL BASE UNIT. Includes the Modulab with space for ten plug-in
modules, a high resolution color graphics monitor, color printer,
keyboard, strip-chart recorder, remote hand-controller, foot
switch and storage cart.
* PVR MODULE. Calibrated Pulse Volume Recorder, used in the
diagnosis of arterial and venous disease in both the upper and
lower extremities.
* CWD/PPG MODULE. Continuous wave Doppler and photoplethysmograph.
The Doppler is used to measure blood velocity in both arteries and
veins by using high frequency ultrasound. The photoplethysmograph
measures blood flow using an infrared sensing device.
* SFA-11 MODULE. Spectrum frequency analysis is used in conjunction
with the CWD/PPG module, Imager module or external input source.
The SFA-11 performs real-time analysis of Doppler frequency shifts
using computerized analysis which transforms audio or visual
images into a quantifiable frequency or velocity.
* OPG MODULE. Ocular pneumoplethysmograph, used to measure pressure
changes of the ophthalmic artery, which in turn reflects the
absence or presence of disease in blood vessels that supply oxygen
to the brain.
* IPG-II MODULE. Impedance plethysmograph, used for the detection of
deep venous thrombosis (DVT) by measuring the change in electrical
impedance (resistance) of a limb as blood flow is occluded
(obstructed) and then restored. DVT is a major source of pulmonary
emboli which can be fatal.
* PAG MODULE. Phonoangiograph, used as a sensitive quantitative
stethoscope to "listen" to the vascular system.
There is currently an installed base of over 350 MVL'S. Prices range
from $23,500 for a basic system, consisting of the MVL base unit, PVR module and
CWD/PPG module, to $70,000 for a fully configured system.
The second product is the Pulse Volume Recorder (PVR-IV) with
calibrated PVR (records height and width of wave length, volume of air in cuff
and pressure), bi-directional Doppler (measures blood velocity using
ultrasound), photoplethysmograph (measures blood flow using an infrared sensing
device) and optional ocular pneumo-plethysmograph (measures pressure changes in
certain arteries). The basic unit is used to diagnose blood vessel disease in
both the upper and lower extremities. There is an installed base of over 2,500
PVR'S, of which over 1,000 are PVR-IV's. The PVR-IV is priced at $15,000. The
PVR is suitable for busy vascular labs, where high patient volume is a major
consideration, foreign markets, smaller U.S. hospitals, and physician offices
which cannot cost-justify the MVL.
SUPPLIES AND TECHNICAL SERVICES. In addition to the sale of medical
instruments, HealthWatch sells disposable supplies, such as ECG recording paper
and electrodes and electrasound gels and cuffs, to purchasers of its cardiology
and peripheral vascular equipment and provides technical service/maintenance for
such equipment. During the nine-month period ended March 31, 1996 and fiscal
1995, sales of supplies and revenues from service and maintenance activities
accounted for approximately 69 and 44 percent, respectively, of HealthWatch's
revenues from its medical products business segment.
SALES AND MARKETING. The Company has a Director of Sales and Marketing,
one full-time and three part-time field sales support representatives and one
customer service representative. The Company's ability to develop and implement
marketing programs for its existing products and to develop a direct sales force
for its products has been limited because of its lack of working capital.
During fiscal 1993, HealthWatch modified its sales and marketing
strategy to focus on sales to hospitals and other health-care institutions due
to changes and uncertainties in the health-care industry which, HealthWatch
believes, adversely affects physician purchases of diagnostic equipment. These
sales are made directly to hospitals, specialty physicians and vascular
laboratories.
The Company markets internationally through selected independent
manufacturers' representatives and distributors who have appropriately trained
staff capable of providing sales and service for the Company's products. The
Company presently has 42 foreign independent manufacturers' representatives and
distributors who service approximately 70 percent of the international markets.
Initially, HealthWatch intends to distribute the Pacer, its first IV
product, through independent manufacturers' representatives. The Company
believes that the long-term success of any marketing program for its IV
instruments may require that the Company obtain a line of disposable IV sets to
distribute with its IV instruments. The Company intends to market its IV
instruments based on their ease of use and potentially significant cost savings
which users may recognize, both due to the instrument's lower cost and the
ability to use lower-priced IV sets.
MANUFACTURING. The Company's manufacturing operations consist primarily
of what is referred to in the industry as "FAT" (final assembly and testing).
The Company has utilized outside consultants to assist in the design of its
products. The Company attempts to maintain a limited inventory of finished
products and normally attempts to fill orders within a month of their receipt.
The Company generally does not have any significant backlog of orders.
HealthWatch is in the beginning stages of producing the Pacer, its
first IV product. Current plans call for producing approximately 100 units of
the Pacer during August and September 1996. Since the Company's primary
activities relating to the production of this product are the assembly, testing
and shipping of the final product, the Company believes that if it has adequate
working capital to fund the purchase of raw materials and component parts it
will be able to increase production levels rapidly after October 1996. Due to
the difficulty of obtaining the original microprocessor chip to be used in the
Pacer, the Company redesigned the Pacer so that it uses a different
microprocessor chip which is more readily available to the Company. Several of
the key components for the Pacer must be ordered 60 or more days in advance of
their anticipated need in order to assure their availability on a timely basis.
This need substantially increases the Company's working capital requirements and
may limit its ability to rapidly increase production capabilities for the Pacer
should this be required in order to meet rapidly increasing order rates for this
product.
Certain raw materials for the Company's products, particularly its new
IV product, are available from only one or a limited number of suppliers and may
be available to the Company only if it places significant orders which represent
several months or more of the Company's projected needs for such materials. The
need to purchase significant quantities of these materials in advance of their
use, substantially increases the Company's working capital requirements. There
can be no assurance that the Company's current suppliers for these products will
continue to supply them to the Company. While alternative sources for such items
are generally available, the Company could be required to re-design its products
in order to be able to use the alternative materials provided by these
additional suppliers. Any such re-design of the Company's products could be
expensive and time-consuming and could require six or more months to complete.
The Company believes that it either has or has commitments to supply quantities
of the most critical components for its new IV product.
During fiscal 1994, HealthWatch completed the relocation of all
manufacturing operations from Broomfield, Colorado to Vista, California. This
move was made in concert with the Company's strategic plans for growth in the IV
business and the anticipated need for new personnel knowledgeable in the IV
business. The Company's facilities in Vista, California are within a 50 mile
radius of five key competitors in the IV industry and a broad base of
prospective qualified personnel.
RESEARCH AND DEVELOPMENT. The Company expects to incur additional
expenses for the completion of the design-related work and initial product
builds for the IV controller and pump systems. In addition, subject to available
capital resources, the Company may make certain enhancements to its Modular
Vascular Laboratory, a product sold under the Life Sciences name. During the
nine months ended March 31, 1996 and 1995 and the years ended June 30, 1995,
1994 and 1993, the Company spent $263,200, $424,388, $499,099, $201,713 and
$281,918, respectively, on research and development activities.
PROPRIETARY INFORMATION. The Company seeks protection of its
proprietary interest in software products and trade secrets. The Company
historically has not relied on patents to protect the proprietary aspects of its
products. While the Company's licensed IV technology includes a U.S. patent, the
patent may not provide significant protection with respect to development of a
competing product with capabilities similar to the Company's initial IV product.
HealthWatch maintains nondisclosure and confidentiality agreements with its
employees. While the enforceability of such agreements cannot be assured, the
Company believes that they provide a deterrent to the use of information which
may be proprietary to the Company. The Company licenses certain technology for
its IV products from Howard R. Everhart, a former officer and director of the
Company, and licenses the technology for certain components of its other
products from unrelated persons for which it pays license or royalty fees.
PRODUCT WARRANTY AND SERVICE. The Company warrants its products against
defects in material and workmanship for one year. Warranty service is ordinarily
provided by the Company. If a product defect cannot be easily fixed at the
customer's office, the Company's policy is to replace the defective component
and return it to the Company's office for repairs.
COMPETITION. There are many companies that produce equipment which
competes with the Company's cardiology products. While there is significant
competition for each of the Company's peripheral vascular products, the number
of competitors, particularly ones that offer as broad a range of products as
does HealthWatch, is significantly less in the peripheral vascular markets than
in the cardiology markets. Many of the Company's competitors, particularly in
the cardiology markets, have substantially greater financial and marketing
resources than the Company. Hewlett-Packard Corporation, Marquette Electronics,
Inc. and Quinton Instruments Co., all of which are substantially larger than
HealthWatch, account for a substantial portion of the market for ECG products
similar to those sold by HealthWatch. For the products to be sold in the IV
instrumentation business there are a number of competitors which provide mostly
"high end" IV controllers and pumps. Over 80% of the domestic market for IV
instruments is dominated by a few companies, including, Baxter Healthcare
Corporation, Abbott Laboratories, IVAC Corporation and IMED Corporation. All of
these companies are substantially larger than HealthWatch. The international
market for IV products is largely fragmented with local manufacturers.
Competition for medical products generally is on the basis of product
performance and cost. The Company's cardiology and vascular products generally
are priced in the mid-range of competing products with the Life Sciences fully
configured MVL product priced at the high-end of the peripheral vascular market.
HealthWatch believes that its cardiology and vascular systems are favorably
priced when compared to competing products which provide comparable features and
quality. The Cambridge and Life Sciences names are well known in their
respective markets. In the IV instrumentation market, competition has
historically been based on product performance and reputation. With the
implementation of the Health Care Reform Act in 1986, competition in these
markets has become more focused on the cost per use of the IV instruments.
HealthWatch IV instruments are expected to be substantially lower in cost per
use than currently marketed products in both the hospital and home-care markets.
The Company expects to encounter intense competition in the market for its IV
products. This could require that the Company commit significantly greater
resources to the introduction of its IV products than would otherwise be
required.
GOVERNMENT REGULATION. The medical devices manufactured and marketed by
the Company are subject to regulation by the FDA and, in some instances, by
state and foreign authorities. Pursuant to the Federal Food, Drug, and Cosmetic
Act and the regulations promulgated thereunder, the FDA regulates the clinical
testing, manufacture, packaging, labeling, distribution and promotion of medical
devices.
Pursuant to the FFDCA, medical devices intended for human use are
classified into three categories, Classes I, II and III, on the basis of the
controls deemed necessary by the FDA to reasonably assure their safety and
effectiveness. Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to good manufacturing practice
regulations) and Class II devices are subject to general and special controls
(for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval from the FDA to ensure their safety and
effectiveness (for example, life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices). Electronic infusion devices are classified by the FDA
as Class II medical devices.
If a new Class II medical device is substantially equivalent in terms
of safety and effectiveness to a medical device already legally marketed in the
United States, the FDA requirements may be satisfied through a procedure known
as a "510(k) Submission," in which the applicant provides product information
supporting its claim of substantial equivalency. "Substantial equivalence" means
that a device has the same intended use and the same technological
characteristics as the legally marketed device, or the same intended use and
different technological characteristics, provided that it can be demonstrated
that the device is as safe and effective as the legally marketed device, and
does not raise different questions regarding safety and effectiveness. A
"legally marketed device" to which a new device may be compared for a
determination regarding substantial equivalence is a device that was legally
marketed prior to May 28, 1976, when the Medical Device Amendments were added to
the FFDCA, or a device which has been reclassified from Class III to Class II or
I, or a device which has been found to be substantially equivalent through the
510(k) premarket notification process.
Commercial distribution of a device for which a 510(k) Submission is
required can begin only after the FDA issues an order finding the device to be
"substantially equivalent" to a legally marketed device. The FDA has recently
been requiring a more rigorous demonstration of substantial equivalence than in
the past. This may include a requirement for clinical testing of the device. It
generally takes from four to twelve months from submission of a 510(k) to obtain
a 510(k) clearance, but it may take longer. The FDA may determine that a
proposed device is not substantially equivalent to a legally marketed device, in
which case a PMA may be required, or that additional information is needed
before a substantial equivalence determination can be made, in which case data
from safety and effectiveness tests, including clinical tests, may be required.
A "not substantially equivalent" determination or a request for additional
information could delay the market introduction of new products that fall into
this category.
The Company received 510(k) clearance to begin marketing the Pacer in
the United States in April 1994.
The FFDCA requires the filing of a new 510(k) Submission when, among
other things, there is a major change or modification in the intended use of the
device or a change or modification, including product enhancements, to a legally
marketed device that could significantly affect its safety or effectiveness. A
device manufacturer is responsible for making the initial determination as to
whether a proposed change to a cleared device or to its intended use
necessitates the filing of a new 510(k) Submission.
The Company does not believe that changes made to the Pacer since the
original 510(k) Submission require a new 510(k) Submission for the Pacer.
However, there can be no assurance that the FDA would agree with the Company's
determination. If in the future the FDA concluded that the changes required a
new 510(k) Submission, the FDA could prohibit the Company from marketing the
Pacer until the Company files a new 510(k) Submission and obtains clearance from
the FDA. The FDA could also take regulatory action against the Company for any
prior distribution of the Pacer which incorporated changes. Alternatively, the
FDA could use its discretion not to take any regulatory steps with regard to
this issue.
The Company is currently preparing a new 510)k) Submission for the
Pacer in order to incorporate two new features, an automatic flow stop and an
increased rate range for infusions. Additional product modifications, including
new software features, that the Company may develop in the future will likely
require 510(k) clearance if the modifications could affect the safety or
efficacy of the Company's products. If the Company determines that any
modifications that it may make to its cleared devices do not require a new
510(k) Submission, there can be no assurance that the FDA would agree with the
Company's determinations and would not require a new 510(k) Submission for any
modifications made to the devices. If the FDA requires the Company to file a new
510(k) Submission for any modification to the device, the Company may be
prohibited from marketing the device as modified until it obtains clearance from
the FDA. There can be no assurance that the Company will obtain 510(k) clearance
on a timely basis, if at all, for any device modification for which it files a
future 510(k) Submission. If 510(k) clearance is granted, there can be no
assurance that it will not contain significant limitations in the form of
warnings, precautions or contraindications with respect to conditions of use.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. Device manufacturers are required to register their establishments and
list their devices with the FDA, and are subject to periodic inspections by the
FDA and certain state agencies. The FFDCA requires devices to be manufactured in
accordance with GMP regulations which impose certain process, procedure and
documentation requirements upon the Company with respect to manufacturing and
quality assurance activities. The FDA has proposed changes to the GMP
regulations which, if finalized, would likely increase the cost of complying
with GMP requirements. The Company believes that its manufacturing and quality
control procedures substantially conform to the requirements of FDA regulations.
In addition, the Medical Device Reporting regulation obligates the
Company to inform the FDA whenever there is reasonable evidence to suggest that
one of its devices may have caused or contributed to death or serious injury, or
where one of its devices malfunctions and, if the malfunction were to recur, the
device would be likely to cause or contribute to a death or serious injury.
Labeling and promotion activities are also subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
If, as a result of FDA inspections, MDR reports or information derived
from any other source, the FDA believes the Company is not in compliance with
the law, the FDA can refuse to clear pending 510(k) Submissions; withdraw
previously cleared 510(k) Submissions; require notification to users regarding
newly found unreasonable risks; request repair, refund or replacement of faulty
devices; request corrective advertisements, formal recalls or temporary
marketing suspension; impose civil penalties; or institute legal proceedings to
detain or seize products, enjoin future violations, or seek criminal penalties
against the Company, its officers or employees. Civil penalties for FFDCA
violations may be assessed by the FDA in lieu of or in addition to instituting
legal action. Civil penalties may range up to $15,000 per violation for
violations of the FFDCA, and a maximum of $1,000,000 per proceeding. Civil
penalties may not be imposed for GMP violations, unless the violations involve a
significant or knowing departure from the requirements of the FFDCA or a risk to
public health. The FDA provides manufacturers with an opportunity to be heard
prior to the assessment of civil penalties. If civil penalties are assessed,
judicial review is available.
The Company intends to export, its products to Europe, Japan and other
foreign countries. Exports of products that have market clearance from the FDA
in the United States do not require FDA authorization for export. However,
foreign countries often require, among other things, an FDA certificate for
products for export. To obtain a CPE the device manufacturer must certify to the
FDA that the product has been granted clearance in the United States and that
the manufacturing facilities appeared to be in compliance with GMPs at the time
of the last FDA inspection. The FDA will refuse to issue a CPE if significant
outstanding GMP violations exist.
International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from country
to country. Many countries also impose product standards, packaging and labeling
requirements, and import restrictions on devices. In addition, each country has
its own tariff regulations, duties and tax requirements. The Company plans to
use its distributors to assist in obtaining any necessary foreign governmental
and regulatory approvals. The Company does not currently have its products
registered or approved in any countries requiring an extensive registration or
approval process and has, therefore, not sold any products in such countries.
The Company has applied for Underwriters Laboratory, Inc. product
recognition under UL 544, Standard for Medical and Dental Equipment for the
Pacer. There can be no assurance that UL recognition for the Pacer will be
obtained. Failure to obtain UL recognition could materially and adversely limit
the Company's ability to sell the Pacer in certain areas in the United States.
To maintain "UL" status, if obtained, the Company will be subject to quarterly
inspections by Underwriters Laboratory, Inc.
The Company and its products are also subject to a variety of state and
local laws and regulations in those states or localities where its products are
or will be marketed. Use of the Company's products is subject to inspection,
quality control, quality assurance, proficiency testing, documentation and
safety reporting standards promulgated by JCAHO. Various states and
municipalities may also have similar regulations.
Manufacturers are also subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. There can be no assurance that
the Company will not be required to incur significant costs to comply with such
laws and regulations.
MEDICAL SERVICES
CROSSROADS MEDICAL CENTER. On December 2, 1988, HealthWatch completed
the sale of seven Denver-area medical centers. HealthWatch continued to operate
through March 1993, its first medical center, the Crossroads Medical Center,
located in Boulder, Colorado. On March 31, 1993, the Company sold the assets of
its medical management business to an unaffiliated company.
HEALTH CARE PROFESSIONAL BILLING. Following the sale of seven of the
Company's medical centers, the HealthWatch billing department began marketing
its services to non-HealthWatch physicians under the name "Health Care
Professional Billing." On February 1, 1993, the Company sold the assets of this
business to an unrelated company.
EMPLOYEES
At July 1, 1996, the Company employed 33 persons, consisting of 6
general administrative, 7 sales and marketing, 7 manufacturing, 5 service, 5
engineering and research and product development personnel and 3 service related
persons at Cambridge Medical Equipments LTD. No retirement or pension or similar
program is in effect for the benefit of the Company's employees.
PROPERTIES
The Company's principal offices are located in 24,535 square feet of
space in Vista California, leased for a 65-month term ending January 6, 1999,
with a two-year renewal option, The incremental rate for this space is $14,400
per month.
The Company leases 2,500 square feet of office space in Cambridge,
England on a month-to-month basis for $1,530 per month.
MANAGEMENT
The directors, executive officers, key employees and nominees for
election to the Board of Directors of HealthWatch are as follows:
<TABLE>
<CAPTION>
Director
Name Since Age Positions With The Company
<S> <C> <C> <C>
Lindley S. Branson -- 53 President and Chief Executive and Chief
Financial Officer
Douglas C. Layman -- 45 Vice President--Engineering
George T. Mier -- 45 Director of Sales and Marketing
Robert P. Apgar -- 43 Director of Manufacturing
David L. Thompson -- 40 Director, Service, Quality Control and
Regulatory Compliance
Annette D. Agner -- 39 Treasurer/Controller
Sanford L. Schwartz 1983 46 Chairman of the Board of Directors
Kenneth A. Selzer, M.D. 1988 41 Director
Ned H. Chambers, M.D. -- 45 Nominee for Election to Board of Directors
Robert M. Stern -- 40 Nominee for Election to Board of Directors
</TABLE>
Lindley S. Branson has been President and Chief Executive and Chief
Financial Officer of the Company since September 1995. Mr. Branson has been a
partner with the Minneapolis, Minnesota law firm of Gray, Plant, Mooty, Mooty &
Bennett, P.A. for more than the last five years. Mr. Branson currently devotes
approximately 50% of his time to the Company.
Douglas C. Layman. Mr. Layman has been Vice President of Engineering of
the Company since April 1995 and provided engineering consulting services to the
Company from March 1995 to April 1995. From February 1982 to February 1995, Mr.
Layman was a Technical Manager in Research and Development for IVAC Corp., a
division of River Acquisitions (formerly a division of Eli Lilly & Company), a
medical products company in the intravenous instrumentation business.
George T. Mier. Mr. Mier has been Director of Sales and Marketing of
the Company since March 1996. Prior to joining HealthWatch, he was Vice
President Sales and Customer Care and Senior Consultant for Innotech, Inc., a
manufacturer of opthalmic equipment and disposables, from 1993 to 1995, National
Sales Director, World Learning, Inc., an educational company, from 1992 to 1993
and National Sales Manager or Regional Manager for American Optical Corp., a
medical products company, from 1988 to 1992.
Robert P. Apgar. Mr. Apgar has been Director of Manufacturing of the
Company since November 1995. Prior to joining HealthWatch, he was a Project
Director with Ivac Corporation, a medical products company in the intravenous
instrumentation business, a position he had held for more than five years.
David L. Thompson. Mr. Thompson has been employed by HealthWatch and
Life Sciences, Inc., a predecessor company, for more than 18 years, recently as
Director, Service, Quality Control and Regulatory Compliance.
Annette D. Agner. Ms. Agner has been Treasurer/Controller of the
Company since 1993 and has been employed by the Company for more than 10 years.
Sanford L. Schwartz. Mr. Schwartz, Chairman of the Board of Directors
of the Company, has been a consultant with Creative Business Strategies, Inc., a
business/development consulting firm, since July 1992. He served as Chief
Executive Officer of the Company from June 1983 to September 1993. Mr. Schwartz
is a director of Renaissance Entertainment Corporation.
Kenneth A. Selzer, M.D. Dr. Selzer is a physician with the U.C.S.D.
Medical Center, La Jolla, California, which position he has held since June
1993. He was a resident in neurology at Vanderbilt University from January 1991
to May 1993 and has been a general partner of La Jolla Consulting Group, a
consulting firm which specializes in biomedical products, biotechnology and
health care services, since January 1989. From November 1985 to December 1988,
Dr. Selzer was President of Integrated Healthcare Services, Inc., a company
which provided administrative services to medical centers.
Ned H. Chambers, M.D. Dr. Chambers has agreed to be nominated for
election to the Board of Directors of the Company at its 1996 Annual Meeting of
Shareholders. Dr. Chambers is a partner in the Shelter Island Medical Group, San
Diego, California, which position he has held for more than five years.
Richard M. Stern. Mr. Stern has agreed to be nominated for election to
the Board of Directors of the Company at its 1996 Annual Meeting of
Shareholders. Mr. Stern is a Business Consultant, specializing in medical
products, marketing and sales. Mr. Stern served as Vice President Marketing and
a Corporate Officer for Molecular Biosystems, Inc., a New York Stock Exchange
pharmaceutical company from 1988 to March 1996.
ADVISORY BOARD
The Company has recently formed an Advisory Board consisting of five
physicians in order to assist the Company in developing its marketing and sales
strategy for its new Pacer products, to help the Company evaluate and develop
new products and possible additions to its IV product line. The members of the
Advisory Board are as follows:
Michael M. Stamos, M.D. Dr. Stamos is Assistant Professor of Surgery,
Chief, Colon & Rectal Surgery, at the University of California, Los Angeles. Dr.
Stamos has published internationally and lectured on medical device research and
conducted studies of emerging technologies for companies such as Phizer and
Johnson & Johnson.
Jack L. Moore, M.D. Dr. Moore is an Attending Physician at Kaiser
Hospital-Bellflower, California, and is currently President of the medical staff
for the hospital and past President of the California Society of
Anesthesiologists and the Los Angeles County Society of Anesthesiologists.
James W. Futrell, M.D. Dr. Futrell is an Attending Physician at Cedars
Sinai Medical Center, Chief Executive Officer of a 120-physician IPA in Los
Angeles and past President of the Los Angeles County Society of
Anesthesiologists.
Kenneth M. Holt, M.D. Dr. Holt is President of Specific Communications
Management Services Organization, Harbor City, California. Dr. Holt is former
Chief of Staff, Bay Harbor Hospital.
Robert W. Finley, M.D. Dr. Finley is a Family Physician, in private
practice in Bellflower, California, and is Chief of Staff, Bellflower Medical
Center.
COMPENSATION
The following table sets forth, on an accrual basis, the aggregate cash
compensation paid by the Company and its subsidiaries during the three fiscal
years ended June 30, 1996, to the Company's President and Chief Executive
Officer, former President and Chief Executive Officer and Chairman of the Board
of Directors. No officer or director of the Company received compensation of
$100,000 or more in fiscal 1996.
<TABLE>
<CAPTION>
Name and Principal Fiscal Options Restricted All Other
Position Year Salary Bonus (No. of Shares) Stock Awards Compensation
- -------- ------ -------- ----- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Lindley S. 1996 $54,000 -- 18,571shs. -- --
Branson, 1995 -- -- -- -- --
President and CEO 1994 -- -- -- -- --
John D. 1996 $49,405 -- 1,429shs. 4,286shs. --
Greenbaum, 1995 $101,207 -- 3,571shs.(1) -- $6,818
President and CEO 1994 $150,000 -- -- $7,200
Sanford L. Schwartz, 1996 $ 36,247(2) -- --
Chairman of the 1995 $ 33,250(2) -- 11,035shs.(1) 35,714shs.(2) --
Board of Directors 1994 $ 25,000(2) -- -- 2,142shs. --
- ------------
</TABLE>
(1) Includes for Messrs. Greenbaum and Schwartz, 3,928 and 3,892 shares,
respectively, subject to previously granted options which were repriced
during the fiscal year.
(2) Includes amounts paid to Creative Business Strategies, Inc. ("CBS").
Mr. Schwartz is an officer, director and principal shareholder of CBS.
The fair market value as of the date of grants of the shares of Common
Stock subject to the stock awards were $81,000 in 1995 and $26,250 in
1994.
During fiscal 1995, Kenneth A. Selzer, M.D., a director of the Company,
received a stock award of 3,571 shares of Common Stock (fair market value at
date of grant of $9,500) and was granted options for 10,714 shares of Common
Stock in consideration for services rendered both as a director and as a
consultant to the Company. Dr. Selzer's outstanding stock options were also
repriced during the year. See "Stock Options."
STOCK BASED COMPENSATION
The Company has a 1989 Incentive Stock Option Plan and 1993 and 1995
Stock Option Plans ("the Plans") for its key employees directors and consultants
to purchase shares of the Company's Common Stock. The Plans provide that the
purchase price of the shares covered by incentive stock options may not be less
than the fair market value of the shares on the date the option was granted.
Nonstatutory stock options granted can be granted at exercise prices of 85% or
more of the fair market value of the Company's Common Stock on the date of
grant. To date, all options granted under the Plans have been at exercise prices
equal to the fair market value of the Common Stock on the date the Company
agreed to grant the options.
The Company has, from time to time, also provided nonstatutory stock
options outside of the Plans to directors, officers and consultants and has
awarded stock grants to officers, directors, employees and consultants in
consideration for services. These nonstatutory options generally have had a term
of three to five years and have had exercise prices equal to the fair market
value of the Company's Common Stock on the date the options were granted. At
July 25, 1996, the Company had an aggregate of 359,998 shares reserved for
issuance under the Plans and its 1995 Stock Bonus and Award Plan.
Directors' Report. On May 1, 1995, the Board of Directors unanimously approved
repricing all outstanding stock options held by current employees and directors
of the Company (a total of 157,189 shares), including 3,928, 3,892 and 5,250
shares subject to options held by John D. Greenbaum, Sanford L. Schwartz and
Kenneth A. Selzer, M.D., respectively, all of whom were directors of the
Company. Mr. Greenbaum was also President and Chief Executive Officer of the
Company at the time of such action. It was the Board of Directors' opinion that
the repricing of these options was appropriate in view of the Company's
inability to provide adequate cash compensation, particularly to its officers
and directors, due to the Company's lack of working capital. On May 1, 1995,
John D. Greenbaum was being paid a salary of $4,167 per month, which represented
a substantial reduction in the $12,500 per month salary he was to have been paid
pursuant to his employment agreement with the Company, and the Company had an
accrued obligation of $43,161 to Sanford L. Schwartz and an affiliated company
which was then past due.
The following table shows option grants during fiscal 1996 to the named
executive officers of the Company.
<TABLE>
<CAPTION>
Name Options Granted Percent of Total Exercise Expiration
Options Granted Price Date
----------------------------- -------------------- ---------------------- ------------ ----------------
<S> <C> <C> <C> <C>
Lindley S. Branson 18,571 shs. 14.8% $3.71 12/11/00
John D. Greenbaum 1,429 shs. 1.1% $3.71 2/6/99
Sanford L. Schwartz None -- -- --
- ---------------------------
</TABLE>
The following table shows the number of options exercised during fiscal
1996 and the 1996 fiscal year-end value of the options held at the end of the
fiscal year by the named executive officer and by the groups indicated.
<TABLE>
<CAPTION>
Value of Unexercised
Shares Acquired on Number of Unexercised Options at in-the-money Options
Exercise June 30, 1996 at June 30, 1996
Name of Options Exercisable/Unexercisable Exercisable/Unexercisable
---- ---------- ------------------------- -------------------------
<S> <C> <C> <C>
Lindley S. Branson None 18,571/-0- shs. $-0-/$-0-
John D. Greenbaum None 5,000/-0- shs. $-0-/$-0-
Sanford L. Schwartz None 6,472/4,564 shs. $21,422/$15,107
</TABLE>
OTHER TRANSACTIONS
During fiscal years 1996, 1995 and 1994, the Company paid certain
directors or affiliated companies fees for services rendered. For information
regarding amounts paid in fiscal 1996 and 1995 to such persons, see
"Compensation." In fiscal 1994, no such director and/or affiliated company
received fees aggregating $60,000 or more except for Creative Business
Strategies, Inc., a company owned by Sanford L. Schwartz, Chairman of the Board
of Directors, and Allen R. Goldstone, a former officer/director of the Company,
which company was paid on an accrual basis approximately $62,000 for services
rendered during fiscal 1994. In addition, Messrs. Schwartz and Goldstone
received stock grants which, on the date of grant, had a fair market value of
approximately $25,000 each.
During September 1993, the Company completed the acquisition of
Metamed, Inc. Howard R. Everhart, a former officer and director of the Company,
and John D. Greenbaum, President of the Company, were officers and directors and
the principal stockholders of Metamed and received 36,492 and 34,820 shares,
respectively, of the Company's Common Stock in connection with such acquisition.
Messrs. Everhart and Greenbaum were elected officers and directors of the
Company upon completion of the acquisition. HealthWatch learned of Metamed in
connection with the Company's retention of Mr. Greenbaum in 1993 to review and
provide recommendations on improving its operating procedures and personnel. Mr.
Greenbaum had had no prior relationship with the Company or any of its officers
or directors. In accordance with a license agreement amended at the time that
HealthWatch acquired Metamed, Inc., Mr. Everhart is to be paid license fees of a
minimum of $40,000 per year for six years commencing with regulatory approval
for the first licensed product (April 7, 1994). Maximum fees to be paid pursuant
to the agreement are $100,000 in the first year (actual amount paid was
$40,000), $450,000 in the second and third years, $325,000 in the fourth year,
$150,000 in the fifth year and $40,000 in the sixth year.
It is HealthWatch's policy that any transaction involving the Company
and an affiliated party be ratified by a majority of independent outside members
of the Company's Board of Directors who do not have an interest in the
transaction and that any such transaction be on terms no less favorable to the
Company or its affiliates than those that are generally available from an
unaffiliated party. Based on the amounts actually paid by affiliated parties for
services rendered by the Company (or affiliated companies) or paid by the
Company (or affiliated companies) for services rendered by affiliated persons,
the Company's Board of Directors believes that each of the foregoing
transactions were on as favorable terms to the Company (or affiliated companies)
as could have been obtained from unaffiliated persons.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of July 25, 1996, the shares of
Common Stock and percentage of total shares owned by the shareholders known to
beneficially own 5% of the Company's outstanding shares of Common Stock, each
director of the Company, the Selling Shareholders and as to all officers and
directors as a group. All persons indicated have (unless indicated to the
contrary) sole or shared with spouse voting and dispositive power over such
shares.
<TABLE>
<CAPTION>
Name and Address of
Beneficial Owner, Amount Percentage Percent After Offering
Name of Director, Name of Selling Beneficially Before Amount to Assuming All
Shareholder Owned Offering be Sold of the Shares are Sold
or Identity of Group ----- ---------- ------- ----------------------
--------------------
<S> <C> <C> <C> <C>
Lindley S. Branson 91,428(1) 5.4% None 4.6%
Profit Sharing Trust
3400 City Center
Minneapolis, MN 55402
Sanford L. Schwartz 58,467(1)(2) 3.5% None 3.0%
Kenneth A. Selzer, M.D. 10,216(1) * None *
All Officers and Directors as a 179,214(1) 10.6% None 9.1%
Group (6 persons)
Melang Holdings 70,000(1) 4.1% 70,000 *
Weiying Wong 50,000(1) 3.0% 50,000 *
Dora Nagel 35,000(1) 2.1% 35,000 *
Jeff Thayler 62,500(1) 3.7% 62,500 *
Fred Catapano 62,500(1) 3.7% 62,500 *
</TABLE>
* Less than one percent of shares outstanding.
(1) Includes for the following persons the number of shares set forth
opposite their name which are issuable within 60 days of the date of
this Prospectus upon exercise of outstanding stock purchase options or
warrants or conversion of outstanding debentures: Branson--32,857
shares; Schwartz--17,777 shares; Selzer--6,645 shares; all officers and
directors as a group--17,492 shares; Melang Holdings--70,000 shares;
Weiying Wong--50,000 shares; Nagel--35,000 shares; Thayler--62,500
shares; and Catapano--62,500 shares.
(2) Includes 35,714 shares owned by Creative Business Strategies, Inc., a
company with which Mr. Schwartz is affiliated.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 14,285,714 shares of Common
Stock, $.07 par value. At July 25, 1996, 1,693,234 shares of Common Stock were
issued and outstanding. All shares of Common Stock have equal voting rights and,
when validly issued and outstanding, have one vote per share in all matters to
be voted upon by shareholders. The shares of Common Stock have no preemptive,
subscription, conversion or redemption rights and may be issued only as fully
paid and nonassessable shares. Cumulative voting in the election of directors is
not allowed, which means that the holders of a majority of the outstanding
shares represented at any meeting at which a quorum is present will be able to
elect all the directors if they choose to do so and, in such event, the holders
of the remaining shares will not be able to elect any directors. On liquidation
of the Company each common shareholder is entitled to receive a pro rata share
of the Company's assets available for distribution to common shareholders.
Holders of shares of Common Stock are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. The Company has not paid any dividends on its Common Stock and intends
to retain earnings, if any, to finance the development and expansion of its
business. Future dividend policy is subject to the discretion of the Board of
Directors and will depend upon a number of factors, including earnings, capital
requirements and the financial condition of the Company.
WARRANTS
The Warrants which grant to the holders thereof the right to purchase
an aggregate of 280,000 shares of the Common Stock which are included in this
offering, were issued in two separate independently negotiated transactions.
These Warrants, which were sold at a warrant purchase price of $.05 per Warrant,
have an exercise price of $2.70 per share and expire on the earlier of June 30,
1997 or 90 days after the effective date of this Registration Statement.
The number of shares issuable upon exercise of the Warrants and the
exercise prices are subject to equitable adjustment upon the occurrence of
certain events such as stock splits, stock dividends and recapitalizations. The
Warrants may be exercised on surrender of the applicable Warrant Certificate on
or before the expiration date of the applicable Warrant exercise, with the form
of "Election to Purchase" executed as directed, and accompanied by payment of
the full exercise price of the number of Warrants being exercised.
DEBENTURES
The Debentures, in the original principal amount of $750,000, mature on
September 1, 1997. Each Debenture bears interest at 10% per annum. At June 30,
1996, $580,000 principal amount of the Debentures were issued and outstanding.
The holders of the Debentures are entitled at any time prior to the
close of business on September 1, 1997, subject to prior redemption, to convert
the Debentures into Common Stock of the Company, at the conversion price of
$14.00 per share, subject to adjustment as described below. No adjustment will
be made on conversion of any Debenture for interest accrued thereon or for
dividends on any Common Stock issued. In the case of Debentures called for
redemption, conversion rights will expire at the close of business on the
redemption date. The Board of Directors has approved offering the Debenture
holders a reduced conversion price of $2.75 per share if they convert their
Debentures during a specified period to be established by the Company.
Subject to certain limitations and as further provided in the
Subscription and Purchase Agreement for the Debentures, the Conversion Price
shall be adjusted upon the occurrence of certain events, including the
subdivision, consolidation or reclassification of the outstanding Common Stock;
the issue of any shares of the Company to holders of Common Stock by way of
stock dividends, other than an issue of shares to holders of Common Stock who
have elected to receive dividends in shares in lieu of receiving cash dividends
paid in the ordinary course; the issuance of rights or warrants to all or
substantially all holders of Common Stock entitling them within a period of 45
days to acquire Common Stock (or securities convertible into Common Stock) at
less than the then current market price of the Common Stock; and the
distribution to all or substantially all holders of Common Stock of shares of
any other class or of rights or warrants or of evidences of indebtedness or of
assets (including cash dividends paid in the ordinary course).
In the event (i) Common Stock issuable upon conversion of the
Debentures is changed into the same or a different number of shares of any class
or classes of stock, whether by capital reorganization, reclassification or
otherwise, (ii) there is a capital reorganization of the Common Stock, or (iii)
there is a merger or consolidation of the Company with or into another
corporation, or a disposition of its properties and assets substantially as an
entirety to any other person, the Debentures then outstanding will thereafter be
convertible into the kind and amount of shares of stock or other securities or
property (including cash) to which the holders thereof would have been entitled
if they had converted such Debentures into Common Stock immediately prior to
such reorganization, reclassification, consolidation, merger or disposition.
Payment of the Debentures is secured by a pledge of the Company's
accounts receivable and other rights to receive payments of money, inventory and
equipment. The payment of the principal of and interest on the Debentures may,
with the consent of at least a majority of the principal amount of the
Debentures then outstanding, be subordinated in right of payment to the prior
payment in full of all Superior Indebtedness of the Company. The Company may, at
its option, issue up to $500,000 of additional indebtedness with equal rights to
payment and to be secured by the Collateral as that of the Debentures.
The Debentures are subject to redemption upon not less than 30 nor more
than 60 days notice by first class mail at the election of the Company, by the
payment of the full principal amount of the Debentures plus accrued interest to
date of redemption.
An Event of Default is defined as (i) default for 30 days in payment of
any interest on the Debentures, (ii) default in payment of principal of the
Debentures when due and payable, (iii) certain events of bankruptcy, insolvency,
receivership or reorganization or (iv) default in the performance or breach of a
covenant or warranty contained in the Subscription and Purchase Agreement for
the Debentures which continues for a period of 60 days after notice thereof. In
case an Event of Default should occur and be continuing, the Holders of not less
than 25% in principal amount of Debentures then outstanding may declare the
principal of all of the Debentures to be immediately due and payable; provided,
however, that the holders of a majority in principal amount of the Debentures
may rescind or annul the declaration of acceleration in certain circumstances.
With the consent of the Holders of at least 66-2/3% in aggregate
principal amount of the outstanding Debentures, the Company and such Holders may
execute a supplemental agreement to add provisions to, or change in any manner
or eliminate any provision of, the Debenture or modify in any manner the rights
of the Debenture Holders, provided that, without the consent of the holder of
each outstanding Debenture so affected, no such supplemental agreement shall,
among other things, (i) change the date of payment of principal of or interest
on any Debenture or reduce the principal amount thereof or the interest thereon
or any premium payable upon the redemption thereof, (ii) reduce the aforesaid
percentage of Debenture Holders whose consent shall be required for the
authorization of any such supplemental agreement, to consent to the
subordination of Debentures, or (iii) adversely affect the right to convert the
Debentures.
Compliance by the Company with certain covenants may be waived by
holders of at least a majority in principal amount of the Debentures at the time
outstanding.
PREFERRED STOCK
The Company is authorized to issue up to 1,428,571 shares of Preferred
Stock in series to be designated by the Board of Directors. There currently are
200,000 outstanding shares of Series A Convertible Preferred Stock. Material
provisions concerning the terms of any series of Preferred Stock such as
dividend rate, conversion features and voting rights, will be determined by the
Board of Directors of the Company at the time of issuance of the Preferred
Stock. The ability of the Board to issue Preferred Stock could be used by the
Company as a means of resisting a change of control of the Company and,
therefore, could be considered an "anti-takeover" device.
The Series A Convertible Preferred Stock is convertible into shares of
Common Stock at a $10.50 per share and is redeemable at the option of the
Company at a $1.50 per share. If HealthWatch does not redeem this Preferred
Stock, it becomes convertible into Common Stock at a reduced conversion price on
August 12, 1996, at the lesser of $7.00 per share or 50% of the then market
value of the Common Stock, provided that the conversion price shall not be less
than $1.75 per share or, if less, the lowest price at which the Company has sold
Common Stock prior to such conversion. Holders of the Preferred Stock have
indicated their desire to convert the Preferred Stock on or about August 12,
1996. Based on current market prices for the Common Stock, the Preferred Stock
will be convertible into approximately 160,000 shares of Common Stock on August
12, 1996. This Preferred Stock has no voting rights except as may be required by
law or any preemptive or subscription rights.
PLAN OF DISTRIBUTION
The shares of Common Stock which are the subject of this offering
include 280,000 shares of Common Stock issuable upon exercise of outstanding
Warrants representing the right to acquire such shares at exercise prices of
$2.70 per share. The Company has been advised that the shares of Common Stock
offered hereby may be sold from time to time by the Selling Shareholders or by
pledgees, donees, transferees, or other successors in interest. Such sales may
be made in the over-the-counter market or otherwise at prices and at terms then
prevailing or at prices related to the then current market price or in
negotiated transactions. The Common Stock may be sold by one or more of the
following: (a) a block trade in which the broker or dealer so engaged will
attempt to sell the Common Stock as agent but may position and resell a portion
of the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (d) in privately
negotiated transactions not involving a broker or dealer. In effecting sales,
brokers or dealers engaged to sell the Common Stock may arrange for other
brokers or dealers to participate. Brokers or dealers engaged to sell the Common
Stock will receive compensation in the form of commissions or discounts in
amounts to be negotiated immediately prior to each sale. Such brokers or dealers
and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended, in
connection with such sales. The Company will receive no proceeds from any sales
of Common Stock by the Selling Shareholders. It is anticipated that the brokers
or dealers, if any, participating in the sales of such securities will receive
the usual and customary selling commissions.
LEGAL MATTERS
The legality of the Common Stock will be passed upon for the Company by
the firm of Gray, Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, Minnesota. A
member of such firm owns 58,571 shares of Common Stock and options and Warrants
representing the right to acquire an aggregate of 32,857 shares of Common Stock
at $3.71 and $5.25 per share.
EXPERTS
The audited financial statements of the Company for the fiscal years
ended June 30, 1995 and 1994 included in this Prospectus and elsewhere in the
Registration Statement have been examined and reported on by Silverman Olson
Thorvilson & Kaufmann, Ltd., whose reports have been included in this Prospectus
and in the Registration Statement upon the authority of that firm as experts in
accounting and auditing.
INDEX TO FINANCIAL STATEMENTS
HEALTHWATCH, INC.
Page
Independent Auditors' Report F-2
Consolidated Balance Sheet at June 30, 1995 and 1994 F-3
Consolidated Statement of Operations for the Years Ended
June 30, 1995 and 1994 F-4
Consolidated Statement of Shareholders' Equity for the
Years Ended June 30, 1995 and 1994 F-5
Consolidated Statement of Cash Flows for the Years Ended
June 30, 1995 and 1994 F-6
Notes to Consolidated Financial Statements for the Years
Ended June 30, 1995 and 1994 F-8
Consolidated Balance Sheet at March 31, 1996 (unaudited)
F-22
Consolidated Statement of Operations for the nine months
ended March 31, 1996 and 1995 (unaudited)
F-23
Consolidated Statement of Cash Flows for the nine months
ended March 31, 1996 and 1995 (unaudited)
F-24
Notes to Consolidated Financial Statements for the nine
months ended March 31, 1996 and 1995 (unaudited)
F-25
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
HealthWatch, Inc.
Vista, California
We have audited the accompanying consolidated balance sheet of HealthWatch, Inc.
and its subsidiaries, as of June 30, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HealthWatch, Inc.
and its subsidiaries as of June 30, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ SILVERMAN OLSON THORVILSON & KAUFMANN LTD
SILVERMAN OLSON THORVILSON & KAUFMANN LTD
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota
August 18, 1995, except for Note 20
which is dated May 13, 1996
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1995 AND 1994
ASSETS 1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 742,981 $ 49,934
Accounts receivable, net of allowance for doubtful
accounts of $29,487 and $95,143, respectively 285,956 753,065
Inventory (Note 3) 927,201 1,206,309
Current portion of note receivable (Note 4) -- 114,189
Subscriptions receivable (Note 13) -- 225,000
Other current assets 104,587 156,289
------------ ------------
Total current assets 2,060,725 2,504,786
Note receivable (Note 4) -- 9,935
Property and equipment, net (Note 5) 138,769 234,623
Intangible assets, net (Note 6) 1,416,072 1,673,270
Other assets 138,553 123,807
------------ ------------
Total assets $ 3,754,119 $ 4,546,421
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 481,438 $ 699,060
Accrued compensation and payroll taxes 214,978 255,395
Other accrued liabilities - related parties 149,399 76,974
Other accrued liabilities - unrelated parties 348,815 391,100
Note payable - related party (Note 8) 160,000 10,000
Notes payable - unrelated parties (Note 9) 125,000 --
Deferred revenue 177,506 173,309
Current portion of long-term debt (Note 10) 3,948 7,399
------------ ------------
Total current liabilities 1,661,084 1,613,237
Long-term debt (Note 10) -- 4,404
Debentures payable - related parties (Note 11) 40,000 85,000
Debentures payable - unrelated parties (Note 11) 540,000 510,000
------------ ------------
Total liabilities 2,241,084 2,212,641
------------ ------------
Contingencies and commitments (Note 12) -- --
Shareholders' equity:
Cumulative preferred stock, $.07 par value; 1,428,571
shares authorized, no shares issued (Note 12) -- --
Common stock, $.07 par value; 14,285,714
shares authorized, 720,060 and 371,791
issued and outstanding, respectively 11,492,407 10,726,912
Accumulated deficit (9,942,423) (8,128,572)
Equity adjustment from foreign currency translation (36,949) (39,560)
Stock subscriptions receivable (Note 13) -- (225,000)
------------ ------------
Total shareholders' equity 1,513,035 2,333,780
------------ ------------
Total liabilities and shareholders' equity $ 3,754,119 $ 4,546,421
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
1995 1994
----------- -----------
<S> <C> <C>
Product sales $ 3,516,252 $ 4,070,146
Product cost of sales 2,399,543 2,951,490
----------- -----------
Gross profit 1,116,709 1,118,656
Operating costs and expenses:
Selling, general and administrative - related parties 149,100 94,586
Selling, general and administrative - unrelated parties 1,956,048 2,418,872
Depreciation and amortization 355,701 404,444
Research and development - related parties 54,047 --
Research and development - unrelated parties 445,052 201,713
----------- -----------
Total operating costs and expenses 2,959,948 3,119,615
----------- -----------
Loss from continuing operations (1,843,239) (2,000,959)
Other income (expense):
Interest income 4,546 14,084
Interest expense - unrelated parties (72,395) (80,476)
Interest expense - related parties (4,548) (8,500)
Miscellaneous 85,182 (3,480)
Metamed product development costs (Note 19) -- (775,580)
Gain on sale of investment (Note 7) -- 84,799
Loss on disposal of fixed assets -- (70,501)
----------- -----------
Total other income (expense) 12,785 (839,654)
----------- -----------
Loss from continuing operations before
extraordinary item (1,830,454) (2,840,613)
Extraordinary item - gain from
extinguishment of debt (Note 17) 61,603 24,328
----------- -----------
Net loss $(1,768,851) $(2,816,285)
=========== ===========
Income (loss) per share of common stock:
Continuing operations $ (4.55) $ (10.39)
Extraordinary item .15 .09
----------- -----------
Net loss per share $ (4.40) $ (10.30)
=========== ===========
Weighted average number of shares outstanding 402,310 273,274
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
TOTAL
COMMON STOCK ACCUMULATED EQUITY SUBSCRIPTION SHAREHOLDERS'
SHARES AMOUNT DEFICIT ADJUSTMENT RECEIVABLE EQUITY
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1993 173,432 $ 8,729,566 $(5,312,287) $ (14,640) $ -- $ 3,402,639
Common stock issued for Metamed acquisition 89,286 700,000 -- -- -- 700,000
Common stock issued in private placement 42,857 519,364 -- -- -- 519,364
Common stock issued for stock
subscriptions (Note 13) 42,857 450,000 -- -- (225,000) 225,000
Common stock issued for
conversion of debentures 11,071 132,718 -- -- -- 132,718
Common stock warrants exercised 2,679 34,628 -- -- -- 34,628
Common stock warrants issued -- 30,000 -- -- -- 30,000
Common stock options exercised 2,884 45,855 -- -- -- 45,855
Common stock issued for services 6,725 84,781 -- -- -- 84,781
Equity adjustment from foreign
currency translation -- -- -- (24,920) -- (24,920)
Net loss -- -- (2,816,285) -- -- (2,816,285)
----------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 1994 371,791 10,726,912 (8,128,572) (39,560) (225,000) 2,333,780
Receipt of subscription (Note 13) -- -- -- -- 225,000 225,000
Common stock issued in public
offering (Note 14) 313,627 409,604 -- -- -- 409,604
Common stock issued for services 29,286 296,850 -- -- -- 296,850
Common stock issued in private placement 4,285 45,000 -- -- -- 45,000
Common stock issued for conversion
of debentures (Note 11) 1,071 14,041 -- -- -- 14,041
Contractual dividend (Note 12) -- -- (45,000) -- -- (45,000)
Equity adjustment from foreign
currency translation -- -- -- 2,611 -- 2,611
Net loss -- -- (1,768,851) -- -- (1,768,851)
----------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 1995 720,060 $11,492,407 $(9,942,423) $ (36,949) $ -- $ 1,513,035
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of the combined financial statements.
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,768,851) $(2,816,285)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 355,701 404,444
Stock issued as payment of expenses 296,850 14,781
Extraordinary gain on extinguishment of debt (61,603) (24,328)
Discount on note receivable 13,639 --
Metamed product development costs -- 775,580
Loss on sale of property and equipment -- 70,501
(Increase) decrease in assets:
Accounts receivable 467,109 226,170
Inventory 279,108 458,135
Other current assets 51,702 45,820
Other assets (15,705) (57,592)
Increase (decrease) in liabilities:
Accounts payable (156,019) 174,379
Accrued liabilities - related parties 72,425 44,701
Accrued liabilities - unrelated parties (127,702) 124,611
Deferred revenue 4,197 (50,137)
----------- -----------
Net cash used in operating activities (589,149) (609,220)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (2,649) (66,670)
Proceeds from sale of property and equipment -- 106,656
Payments received on note receivable 110,485 89,956
----------- -----------
Net cash provided by investing activities 107,836 129,942
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 454,604 617,975
Proceeds from subscriptions receivable 450,000 --
Proceeds from issuance of note payable - related party 150,000 10,000
Proceeds from issuance of note payable - unrelated parties 125,000 --
Repayment of long-term debt (7,855) (119,316)
----------- -----------
Net cash provided by financing activities 1,171,749 508,659
----------- -----------
Effect of exchange rate changes on cash 2,611 (24,920)
----------- -----------
Increase in cash 693,047 4,461
Cash - beginning of year 49,934 45,473
----------- -----------
Cash - end of year $ 742,981 $ 49,934
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1995 1994
------------ --------
Cash paid during the year for interest $ 75,724 $ 90,912
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended June 30, 1995:
The Company forgave $13,639 of a note receivable in exchange for the
repayment of the note before maturity.
The Company had $61,603 of accounts payable forgiven (Note 17),
resulting in an extraordinary gain.
Debenture holders converted $15,000 of debentures to 1,071 shares of
common stock valued at $14,041, net of $959 of debenture issuance costs
written-off.
The Company issued 29,286 shares of common stock valued at $296,850 in
exchange for services.
The Company declared a contractual dividend of $45,000 (Note 12).
During the year ended June 30, 1994:
In connection with the acquisition of Metamed, Inc., the Company
acquired $9,819 of property and equipment, $3,406 of other assets net
of $33,081 of accounts payable for 89,286 shares of common stock valued
at $700,000. Along with $11,426 of prepaid merger costs and $44,298 of
accrued professional fees incurred, the $775,580 excess purchase price
was charged to expense as incomplete development costs.
The Company entered into agreements to issue 42,857 shares of common
stock in exchange for a subscriptions receivable of $450,000.
Debenture holders converted $155,000 of debentures to 11,071 shares of
common stock valued at $132,718, net of $10,410 of debenture issuance
costs written-off and $11,872 of registration fees paid.
The Company issued 6,725 shares of common stock valued at $84,781 in
exchange for services.
The Company had $24,328 of accounts payable forgiven (Note 17),
resulting in an extraordinary gain.
The accompanying notes are an integral part
of the consolidated financial statements.
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization:
HealthWatch, Inc. (HealthWatch or the Company)
manufactures and distributes medical products to hospitals
and medical clinics worldwide. The Company grants credit
to its customers in the normal course of business.
Principles of Consolidation:
The consolidated financial statements include the accounts
of HealthWatch and HealthWatch Technologies, Inc., a
wholly-owned subsidiary of the Company, and its
wholly-owned subsidiaries Life Sciences, Inc. and
Cambridge Medical Equipment Limited.
Inventory:
Inventory is recorded at the lower of cost (determined on
a first-in, first-out basis) or market.
Property and Equipment:
Property and equipment is stated at cost. Depreciation is
computed using straight-line methods and is expensed based
upon the estimated useful lives of the assets.
Expenditures for additions and improvements are
capitalized, while repairs and maintenance are expensed as
incurred.
Intangible Assets:
Intangible assets have been accounted for under the
provisions of Accounting Principles Board Opinion No. 17
"Intangible Assets".
The Company has not adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" (SFAS 121) in fiscal 1995. SFAS 121 is
effective for years beginning after December 15, 1995 and
requires the Company to review long lived assets and
certain identifiable intangibles for impairment, by
estimating the future cash flows expected to result from
the use and disposal of the asset in comparison with the
carrying value of the asset. The Company has not
determined what effect, if any, early adoption of SFAS 121
would have on the 1995 financial statements.
Deferred Revenue:
Deferred revenue represents amounts received on service
contracts but not yet earned. Revenue is recognized on a
straight-line basis over the life of the contract.
Equity Adjustment From Foreign Currency Translation:
The equity adjustment from foreign currency translation
arises upon translating the Cambridge Medical Equipment
Limited activity to U.S. dollars from British pounds.
Revenue Recognition:
The Company recognizes revenue from product sales at the
time ownership transfers to the customer, principally, at
shipment.
Income Taxes:
Income taxes are provided for the tax effects of
transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes, if
any. Deferred taxes represent the net tax effects of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Income (Loss) Per Share of Common Stock:
Income (loss) per share is calculated based on the
weighted average number of shares actually outstanding as
the effect of including the common stock equivalents would
be anti-dilutive.
Concentrations of Credit:
Financial instruments that potentially subject the Company
to concentrations of credit risk consist principally of
trade accounts receivable. Accounts receivable arise from
the sale of medical products to hospitals and medical
clinics worldwide. The Company performs ongoing credit
evaluations of its customers' financial condition, and
generally requires no collateral from its customers. The
Company's credit losses are subject to general economic
conditions of the medical industry.
Reclassifications:
Certain reclassifications have been made in the 1994
financial statements in order to conform with 1995
financial statement presentation. These reclassifications
have no effect on accumulated deficit or net loss, as
originally reported.
NOTE 2: MANAGEMENT'S OPERATING PLANS
As a result of recurring losses and negative cash flow from
operations, management has reviewed their operational and
financial plans relative to their ability to continue in
existence.
NOTE 2: MANAGEMENT'S OPERATING PLANS (CONTINUED)
Management's plans in this regard, include the completion of
development of their new proprietary and patented product to
be used in the intravenous ("IV") drug infusion industry.
Their new IV product, the "Pacer", has received FDA approval
and is currently in its final phase of testing. Currently,
management is anticipating Pacer's market release during the
second quarter of fiscal 1996 and believes the product's
profitability will contribute greatly toward the future
operations of the Company.
In the event that this new product is not commercially
successful, management plans to trim general and
administrative expenses, liquidate any excess inventory, and
sell or discontinue any non-performing operating lines in
order to focus full attention and all resources in their
remaining products.
NOTE 3: INVENTORY
Inventory consisted of the following at June 30:
1995 1994
------------ -----------
Raw materials $ 655,960 $ 929,634
Work in process 135,235 204,296
Finished goods 136,006 72,379
------------ -----------
Total inventory $ 927,201 $ 1,206,309
============ ===========
NOTE 4: NOTE RECEIVABLE
The Company had a note receivable resulting from the 1993 sale
of its medical billing and collections services segment.
During 1995, the note was repaid in exchange for the Company's
forgiveness of $13,639 of the remaining note balance.
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30:
<TABLE>
<CAPTION>
Estimated
Useful
Life
1995 1994 In Years
----------- ----------- ---------
<S> <C> <C> <C>
Furniture and equipment $ 846,771 $ 844,122 5
Leasehold improvements 29,197 29,197 5-6
----------- -----------
Total property and equipment 875,968 873,319
Less accumulated depreciation (737,199) (638,696)
----------- -----------
Property and equipment, net $ 138,769 $ 234,623
=========== ===========
</TABLE>
Depreciation expense was $98,503 and $132,746 for 1995 and
1994, respectively.
NOTE 6: INTANGIBLE ASSETS
Intangible assets arose in the acquisition of Life Sciences
and consisted of the following at June 30:
<TABLE>
<CAPTION>
Estimated
Useful Life
1995 1994 In Years
----------- ----------- ---------
<S> <C> <C> <C>
Technology $ 1,594,838 $ 1,594,838 10
Drawings & documentation 347,149 347,149 10
Life Sciences name 300,000 300,000 10
Applications 250,000 250,000 10
Customer base 225,000 225,000 10
----------- -----------
2,716,987 2,716,987
Less accumulated amortization (1,300,915) (1,043,717)
---------- -----------
Intangible assets, net $ 1,416,072 $ 1,673,270
=========== ===========
</TABLE>
Amortization expense was $257,198 and $271,698 for 1995 and
1994, respectively.
NOTE 7: INVESTMENT IN DISCOVERY TECHNOLOGIES, INC.
During 1994, the Company sold its remaining 61,189 shares of
Discovery Technologies, Inc. common stock to an outside
investor. These shares were sold for $84,799 and the
cancellation of certain indebtedness owed to the Company which
had been written off by the Company as uncollectible in 1992.
NOTE 8: NOTE PAYABLE - RELATED PARTY
Note payable - related party consisted of the following at
June 30:
<TABLE>
<CAPTION>
1995 1994
------------- -------
<S> <C> <C>
Note payable to an entity owned by a
shareholder/director of the Company.
The note bears interest at 10%, is
unsecured and due on demand. This note
was repaid in July, 1995. $ 160,000 $ --
Note payable to shareholder/officer of the Company. The note
bears interest at 8%, is unsecured and due on demand.
This note was repaid during fiscal 1995. -- 10,000
---------- ---------
Note payable - related party $ 160,000 $ 10,000
========== =========
</TABLE>
NOTE 9: NOTES PAYABLE - UNRELATED PARTIES
Notes payable - unrelated parties consist of short-term loans
bearing interest at 10%, payable at the earlier of October 7,
1995, or when the Company's gross proceeds from the sale of
equity securities achieves $500,000 (Note 14). The notes are
secured by substantially all corporate assets and were repaid
in August 1995.
In connection with these notes and certain other commitments
provided by the noteholders, the Company issued to the note
holders warrants to purchase up to 142,857 shares of the
Company's common stock at $1.75 per share (Note 12). The
warrants expire in April 1997 and are redeemable by the
Company after April 1, 1996 for $.35 per share.
NOTE 10: LONG-TERM DEBT
Long-term debt consisted of the following at June 30:
<TABLE>
<CAPTION>
1995 1994
--------------- ------------
<S> <C> <C>
Note payable - secured by computer and
software with interest at 15.2%. The note
matures May 1996. $ 3,948 $ 7,908
Note payable - secured by telephone system with
interest at 10.5%. The note was repaid in 1995. - 3,895
------------ -----------
3,948 11,803
Less current portion (3,948) (7,399)
------------ -----------
Long-term debt $ -- $ 4,404
============ ===========
</TABLE>
NOTE 11: DEBENTURES PAYABLE
Debentures payable accrue interest at an annual rate of 10%,
payable quarterly. The debentures mature September 1997 and
are secured by substantially all corporate assets. The
debentures can be converted into common stock at any time
prior to maturity at an initial conversion rate of one share
of common stock for every $14.00 of debentures converted.
During 1995, debentures aggregating $15,000 were converted to
1,071 shares of the Company's common stock, resulting in an
increase in equity of $14,041, net of $959 of debenture
issuance costs written-off. Additionally in 1995, as the
result of changes in board membership, $35,000 of the June 30,
1994 debentures payable - related parties has been
reclassified as debentures payable - unrelated parties at June
30, 1995.
NOTE 11: DEBENTURES PAYABLE (CONTINUED)
During 1994, debentures aggregating $155,000 were converted to
11,071 shares of the Company's common stock, resulting in an
increase in equity of $132,718, net of $10,410 of debenture
issuance costs written-off and $11,872 of registration fees
paid.
Debentures payable to related parties consist of debentures
issued to directors, officers and shareholders of HealthWatch.
NOTE 12: CONTINGENCIES AND COMMITMENTS
Convertible/Redeemable Preferred Stock:
In May 1995 as settlement of a dispute with certain common
stockholders, the Company contractually committed to
convert 57,143 shares of the Company's common stock into
400,000 shares of the Company's Series A 10% - cumulative
preferred stock. These stockholders are entitled to
cumulative dividends accruing from October 1994
aggregating $45,000, which are included in accrued
liabilities - unrelated parties at June 30, 1995.
The preferred stock will initially be convertible into
shares of common stock at a conversion price of $10.50. If
the Company does not redeem the preferred stock, one-half
of the preferred stock becomes convertible at a reduced
conversion price on March 12, 1995 and the balance becomes
convertible at a reduced conversion price on August 12,
1996. In both cases, the reduced conversion price is the
lesser of $7.00 per share or 50% of the market value for
the common stock, provided that the conversion price shall
not be less than $1.75 per share or, if less, the lowest
price at which HealthWatch has sold its common stock prior
to the conversion.
As of June 30, 1995, the preferred stock had been
authorized but not issued. As a result, at June 30, 1995,
the 57,143 shares of common stock to be converted are
reflected as common stock outstanding in the 1995
financial statements.
Stock Options:
At June 30, 1995, an aggregate of 50,000 shares of common
stock were reserved for issuance under the Company's 1983
Incentive Stock Option Plan and 1989 and 1994 Stock Option
Plans. Pursuant to the plans, the Board of Directors may
grant options to key individuals at their discretion.
Option prices under the Incentive Stock Option Plan may
not be less than the fair market value on the date the
option is granted, whereas, non-statutory stock option
prices may not be less than 85% of the fair market value
on the date the option is granted.
NOTE 12: CONTINGENCIES AND COMMITMENTS (CONTINUED)
Stock Options (continued):
As of June 30, 1995, the Company had qualified and
nonqualified options outstanding as follows:
Common Shares Exercise Expiration
Under Option Price Per Share Date
------------- --------------- --------------
1,072 $ 68.32 December 1996
18 $ 45.50 April 1997
6,259 $ 2.66 August 1997
5,125 $ 15.75 August 1997
1,679 $ 22.75 November 1997
821 $ 2.66 November 1997
107 $ 15.75 November 1997
179 $ 15.75 December 1997
357 $ 2.94 May 1998
3,571 $ 2.94 September 1998
179 $ 2.66 September 1998
3,036 $ 2.66 December 1998
893 $ 19.32 December 1998
3,571 $ 2.66 December 1999
3,571 $ 7.42 January 2000
3,571 $ 2.66 January 2000
42,857 $ 2.66 May 2000
--------------
76,866
==============
Various officers and directors have been granted a total of
56,929 options under the Company's Stock Option Plans (Note
15) which are included in the above table.
Options to purchase a total of 76,866 common shares were
outstanding, of which 17,010 are exercisable at June 30, 1995.
Stock Warrants:
At June 30, 1995, the Company had warrants outstanding as
follows:
Common Shares Exercise Expiration
Under Warrant Price Per Share Date
------------- --------------- --------------
25,714 $ 1.75 December 1995
156,813 $ 5.25 December 1996
14,286 $ 2.94 December 1996
142,857 $ 1.75 April 1997
13,393 $ 1.40 August 1997
57,143 $ 2.10 May 2000
57,143 $ 2.10 June 2000
-------------
467,349
=============
NOTE 12: CONTINGENCIES AND COMMITMENTS (CONTINUED)
Stock Warrants (continued):
The following warrants have redemption rights:
Warrants that represent the right to acquire 156,813
shares at $5.25 per share are redeemable by the Company
after November 15, 1995, warrants that represent the right
to acquire 14,286 shares at $2.94 per share are redeemable
by the Company after April 1, 1996 for $.35 per share, and
warrants that represent the right to acquire 142,857
shares at $1.75 per share are redeemable by the Company
after April 1, 1996 for $.35 per share.
Operating Leases:
The Company leases its corporate offices and manufacturing
facilities under non-cancellable operating leases.
Future minimum lease payments are as follows for the years
ended June 30:
1996 $ 172,800
1997 172,800
1998 172,800
1999 158,400
-----------
$ 676,800
==========
Rent expense for 1995 and 1994 was $204,523 and $229,990,
respectively.
Warranty Reserve:
The Company sells the majority of its products with repair
or replacement warranties. The Company has established an
accrued warranty reserve of $19,327 and $60,006, at June
30, 1995 and 1994, respectively, for estimated future
warranty claims. These amounts are included in other
accrued liabilities - unrelated parties.
Litigation:
During 1994, the landlord of the Company's former
corporate offices filed a claim against the Company. The
claim alleged that the Company was in breach of its lease
and sought damages aggregating approximately $200,000.
During 1995, a settlement was reached which requires the
Company to pay $65,000 to the landlord. Pursuant to the
settlement, the $65,000 accrues interest at 11% and is
payable in installments through November 1995. As of June
30, 1995, $50,000 of the settlement is included in accrued
liabilities - unrelated parties.
NOTE 12: CONTINGENCIES AND COMMITMENTS (CONTINUED)
Lease Guarantee:
During 1994, the lease for the medical services building
was transferred to the 1993 purchaser of the medical
service business; however, the Company has agreed to
guarantee the lease through its July 1998 expiration. As
of June 30, 1995, total future minimum lease payments
remaining are $102,900.
NOTE 13: SUBSCRIPTIONS RECEIVABLE:
As of June 30, 1994, the Company had entered into agreements
to issue 42,857 shares of common stock at a per share price of
$10.50 in exchange for subscriptions receivable aggregating
$450,000. During fiscal 1995, these subscriptions were
received.
NOTE 14: PUBLIC SECURITIES OFFERING
At June 30, 1995, the Company was offering up to 200,000 units
of its securities for sale to the public at $7.00 per unit;
each unit consisting of four shares of common stock and two
stock purchase warrants, representing the right to purchase
additional shares of common stock. Through June 30, 1995, the
Company had sold 313,627 shares of common stock and 156,813
warrants to purchase shares of common stock, resulting in
proceeds net of commission and other direct expenses
(aggregating $139,244) of $409,604.
Subsequent to year end, the Company completed the offering and
sold an additional 281,223 shares of common stock and 140,611
warrants to purchase shares of common stock resulting in
additional proceeds net of commissions and other direct
expenses (aggregating $111,862) of $380,278.
NOTE 15: RELATED PARTY TRANSACTIONS
Stock Options:
At June 30, 1995, the Company had outstanding the following
qualified and nonqualified stock options granted to
officers and directors:
Common Shares Exercise Expiration
Under Option Price Per Share Date
------------- --------------- --------------
5,037 $2.66 August 1997
643 $2.66 November 1997
357 $2.94 May 1998
3,571 $2.94 September 1998
893 $2.66 December 1998
3,571 $2.66 December 1999
3,571 $2.66 January 2000
39,286 $2.66 May 2000
------------
56,929
NOTE 15: RELATED PARTY TRANSACTIONS (CONTINUED)
Of the total outstanding options granted to officers and
directors as discussed above, options to acquire up to an
aggregate of 7,309 shares of common stock are exercisable
at June 30, 1995.
Technology and Patent Licensing Agreement:
The Company has an agreement with a former
officer/director and current stockholder to license
certain technology and patent rights through April 2000 in
exchange for a fee. The fee is based on a variable per
unit sold rate. The maximum and minimum fees to be paid
for each of the years are as follows:
Year Ending Minimum Maximum
June 30, Fee Fee
-------------- -------------- -----------
1994 $ 40,000 $ 100,000
1995 40,000 450,000
1996 40,000 450,000
1997 40,000 325,000
1998 40,000 150,000
1999 40,000 40,000
------------- ------------
$ 240,000 $1,515,000
============= ===========
During 1995 and 1994, licensing fee expense was $40,000.
Consulting Agreements:
In September 1993, the Company entered into a one year
consulting agreement with Creative Business Strategies,
Inc. (CBS), a company owned by two persons, a current
director of the Company and a former director. Pursuant to
the agreement, CBS is to provide the Company with business
development consulting services in exchange for a monthly
fee of $2,000 plus 5.0% of the value of any CBS-initiated
transactions completed by the Company. During 1995 and
1994, the Company had incurred $31,100 and $61,986,
respectively, of fees to CBS, of which $34,813 and
$51,586, remained unpaid at June 30, 1995 and 1994,
respectively, and are included in other accrued
liabilities - related parties.
During 1995, a former officer/director and current
shareholder of the Company provided product development
services to the Company in exchange for a fee aggregating
$54,047.
In July 1993, the Company entered into a one-year
consulting agreement with one of the Company's Directors.
Pursuant to the agreement, the Company received financial
and accounting consultation in exchange for a monthly fee
of $1,500. During 1994, the Company incurred and paid
$18,000. As of June 30, 1994, this individual was no
longer a director of the Company.
Stock Grants:
During 1995, two members of the Company's Board of
Directors were granted an aggregate of 39,286 shares of
the Company's common stock as a bonus valued at $78,000.
During 1994, two members of the Company's Board of
Directors were granted 1,429 shares of the Company's
common stock as a bonus valued at $25,000.
As of June 30, 1995 and 1994, none of the shares
underlying these grants had been issued, and accordingly
the value of these bonuses ($103,000 at June 30, 1995 and
$25,000 at June 30, 1994) are included in other accrued
liabilities - related parties.
NOTE 16: INCOME TAXES
The effective tax rate varies from the maximum federal
statutory rate as a result of the following items:
<TABLE>
<CAPTION>
1995 1994
------ -----
<S> <C> <C>
Tax benefit computed at the maximum
federal statutory rate (34.0)% (34.0)%
Increase in taxes resulting from amortization
of intangible assets 6.0 9.0
Loss to be carried forward 28.0 25.0
----- -----
Income tax provision -- % -- %
===== =====
</TABLE>
Deferred taxes consisted of the following at June 30:
<TABLE>
<CAPTION>
1995 1994
------------- ------------
<S> <C> <C>
Asset:
Net operating loss carryforward $ 1,400,000 $1,275,000
Other 100,000 125,000
------------ ------------
Net deferred tax asset 1,500,000 1,400,000
Less valuation allowance (1,500,000) (1,400,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
</TABLE>
For financial statement purposes, no tax benefit has been
reported in 1995 and 1994 as the Company has had significant
losses in recent years and realization of the tax benefits is
uncertain. Accordingly, a valuation allowance has been
established for the full amount of the deferred tax asset.
At June 30, 1995, the Company had net operating loss
carryforwards and unused investment tax credits as follows for
income tax purposes:
Carryforward Net Operating Investment
Expires Loss Tax Credits
June 30, Carryforwards Carryforward
------------ ------------- ------------
2000 $ -- $ 16,060
2001 -- 2,468
2002 -- 9,464
2003 322,286 --
2004 122,457 --
2005 318,718 --
2006 235,901 --
2007 1,461,790 --
2008 281,054 --
2009 1,644,839 --
2009 1,600,000 --
------------ ------------
$5,987,045 $ 27,992
============ ============
The utilization of the carryforwards is dependent upon the
ability to generate sufficient taxable income during the
carryforward period. In addition, the availability of these
net operating loss carryforwards offset future taxable income
is significantly limited due to ownership changes as defined
in the Internal Revenue Code.
NOTE 17: EXTRAORDINARY ITEM - GAIN FROM EXTINGUISHMENT OF DEBT
During 1995, the Company negotiated with trade creditors to
settle $99,205 of past due accounts payable for $37,602. The
transactions resulted in an extraordinary gain of $61,603.
In 1994, an obligation to an officer of the Company was
discharged resulting in an extraordinary gain of $24,328.
NOTE 18: GEOGRAPHICAL SEGMENT INFORMATION
1995 1994
----------- -----------
Revenues:
United States $ 2,954,888 $ 3,636,777
Europe 561,364 433,369
Eliminations -- --
----------- -----------
Consolidated $ 3,516,252 $ 4,070,146
=========== ===========
Operating profit (loss):
United States $(1,893,411) $(2,007,688)
Europe 50,172 6,729
Eliminations -- --
----------- -----------
Consolidated $(1,843,239) $(2,000,959)
=========== ===========
Identifiable Assets:
United States $ 3,491,948 $ 4,327,317
Europe 262,171 219,104
Eliminations -- --
----------- -----------
Consolidated $ 3,754,119 $ 4,546,421
=========== ===========
Exports of U.S. produced medical products were $756,869 and
$794,836 during 1995 and 1994, respectively.
NOTE 19: ACQUISITION
In September 1993, HealthWatch acquired Metamed, Inc.
(Metamed). Pursuant to the agreement, HealthWatch issued
89,286 shares of its common stock in exchange for 100 percent
of the issued and outstanding common stock of Metamed.
The total Metamed purchase price was $755,724 consisting of
89,286 shares of HealthWatch common stock valued at $700,000
and $55,724 of professional fees incurred in connection with
the acquisition. The $1.12 per share price used to value the
acquisition represented HealthWatch's approximate trading
price at the date of the transaction, discounted to factor in
the reduction in the value stemming from the restricted
distribution rights of these non-registered shares and the
size of the block issued.
HealthWatch accounted for the acquisition under the purchase
method whereby the assets and liabilities of Metamed are
recorded at their fair value as estimated by management, which
approximated net book value as of the date of acquisition for
all tangible assets. Net tangible assets acquired included
property, equipment and other assets of $13,225 and accounts
payable of $33,081. The $775,580 excess purchase price over
the fair market value of tangible assets and liabilities
acquired has been charged to expense as incomplete development
of the Metamed product at the date of acquisition.
<TABLE>
<CAPTION>
1994 PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
HealthWatch, Pro-forma HealthWatch,
Inc. Metamed Consolidating Inc.
Consolidated Inc. Entries Consolidated
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Sales $ 4,070,146 $ -- $ -- $ 4,070,146
Cost of sales 2,951,490 -- -- 2,951,490
Operating expenses 3,119,615 792 -- 3,120,407
----------- ----------- -------------- -----------
Loss from continuing operations (2,000,959) (792) -- (2,001,751)
Other income (expense) (839,654) -- -- (839,654)
----------- ----------- -------------- -----------
Loss before continuing
operations before discounted
operations and extraordinary item (2,840,613) (792) -- (2,841,405)
Income before discounted operations -- -- -- --
----------- ----------- -------------- -----------
Loss before extraordinary item (2,840,613) (792) -- (2,841,405)
Extraordinary item - gain from
extinguishment of debt 24,328 -- -- 24,328
----------- ----------- -------------- -----------
Net loss $(2,816,285) $ (792) $ -- $(2,817,077)
=========== =========== ============== ===========
Net loss per share $ (10.30) $ (9.80)
=========== ===========
Weighted average number of shares outstanding 273,274 288,322
=========== ===========
</TABLE>
NOTE 20: SUBSEQUENT EVENT - REVERSE STOCK SPLIT
On May 13, 1996 the Board of Directors approved a
one-for-seven reverse stock split of the Company's common
stock. Accordingly, all share, per share, weighted average
share, stock option and stock warrant information in these
financial statements have been restated to reflect the
split.
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
ASSETS
<S> <C>
Current assets:
Cash $ 115,851
Accounts receivable, net 212,450
Inventory (Note 4) 985,750
Other current assets 29,659
------------
Total current assets 1,343,710
Property and equipment, net 70,771
Intangible assets, net 1,230,935
Other assets 135,819
------------
Total assets $ 2,781,235
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Note 5) $ 182,714
Accrued compensation and payroll taxes 218,907
Other accrued expenses - related parties (Note 5) 27,004
Other accrued expenses - unrelated parties (Note 5) 200,988
Note payable - related party -0-
Notes payable - unrelated parties -0-
Deferred revenue 121,605
Current portion of long-term debt 718
Total current liabilities 751,936
Debentures payable - related parties 40,000
Debentures payable - unrelated parties 540,000
------------
Total liabilities 1,331,936
Shareholders' equity:
Cumulative preferred stock, $.07 par value; 1,428,571 shares 600,000
authorized, 400,000 issued and outstanding. (Note 6)
Common stock, $.07 par value; 14,285,714 shares authorized, 12,130,808
1,296,150 issued and outstanding (Notes 5,6 &7)
Accumulated deficit (11,216,750)
Equity adjustment from foreign currency translation (64,759)
------------
Total shareholders' equity 1,449,299
Total liabilities and shareholders' equity $ 2,781,235
</TABLE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
1996 1995
----------- -----------
Product sales $ 1,531,833 $ 2,953,238
Product cost of sales 1,173,462 2,109,387
----------- -----------
Gross profit 358,371 843,851
Operating costs and expenses:
Selling, general and administrative 1,030,246 1,362,257
Depreciation and amortization 261,596 280,923
Research and development 263,200 424,388
----------- -----------
Total operating costs and expenses 1,555,042 2,067,568
----------- -----------
Loss from continuing operations (1,196,671) (1,223,717)
Other income (expense):
Interest income 7,998 4,515
Interest expense (50,756) (51,954)
Miscellaneous (Note 5) 10,102 0
----------- -----------
Total other income (expense) (32,656) (1,271,156)
----------- -----------
Loss from reduction in note receivable 0 (13,639)
----------- -----------
Net loss $(1,229,327) $(1,284,795)
=========== ===========
Net loss per share (Note 3) ($ 1.05) $ (3.32)
=========== ===========
Weighted average number of shares outstanding 1,169,871 387,393
=========== ===========
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,229,327) $(1,267,095)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Stock issued as payment of expenses 140,112 220,050
Depreciation and amortization 261,596 280,923
Gain on Extinguishment of Debt (10,102) -0-
Decrease (increase) in assets:
Accounts receivable 73,506 244,099
Inventory (58,549) 126,028
Other current assets 104,928 (11,370)
Other assets 2,733 14,728
Increase (decrease) in liabilities:
Accounts payable (66,088) (105,616)
Accrued expense - related parties 9,818 -0-
Accrued expenses - unrelated parties (176,495) (56,078)
Deferred revenue (55,901) 16,425
----------- -----------
Net cash used in operating activities (1,003,756) (524,267)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (8,461) (2,649)
Payments received on note receivable -0- 110,485
----------- -----------
Net cash provided by investing activities (8,461) 107,836
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) of note payable (285,000) 90,000
Repayment of long-term debt (3,230) (6,846)
Net proceeds (costs) of issuance of common stock 701,127 (13,164)
Payments received on stock subscriptions -0- 495,000
----------- -----------
Net cash provided by (used in)
financing activities 412,897 564,990
----------- -----------
Effect of exchange rate changes on cash (27,810) 5,689
----------- -----------
Increase (decrease) in cash (627,130) 154,248
Cash - beginning of period 742,981 49,934
----------- -----------
Cash - end of period $ 115,851 $ 204,182
=========== ===========
</TABLE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
Note 1: Principles of Presentation
The accompanying unaudited financial statements reflect all adjustments which in
the opinion of management are necessary for a fair presentation of the Company's
financial position as of March 31, 1996, the results of operations and its cash
flows for the nine months ended March 31, 1996 and 1995.
Note 2: Management's Operating Plans
As a result of recurring losses and negative cash flow from operations,
management has reviewed its operational and financial plans relative to their
ability to continue in existence. Management's plans in this regard, include the
completion of development of the Company's new proprietary product to be used in
the intravenous ("IV") drug infusion industry. The Company's new IV product, the
Pacer, has received FDA approval. The Company commenced the first hospital
evaluation of this product in November, 1995. Management believes the product's
profitability will contribute greatly toward the future operations of the
Company.
Note 3: Net Income (Loss) per Share
The net income (loss) per share in the fiscal 1996 and 1995 periods were
computed based on the weighted average number of shares outstanding during the
periods without taking into effect outstanding options as their effect would be
either anti-dilutive or dilutive by less than 3%.
Note 4: Inventory
Inventory consisted of the following at March 31, 1996 and June 30, 1995:
3/31/96 6/30/95
---------- ----------
Raw Materials $611,165 $655,960
Work in process 256,295 135,235
Finished goods 118,290 136,006
------- -------
$985,750 $927,201
-------- --------
Note 5: Supplemental schedule of non-cash operating, investing and financing
activities during the nine months ended March 31, 1996.
The Company had $10,102 of accounts payable forgiven during the first nine
months resulting in a gain from the extinguishment of debt and issued an
aggregate of 106,789 shares of its Common Stock in payment of trade accounts
payable of $351,338. The Company issued an additional 27,296 shares valued at
$83,089 in exchange for services, 40,714 shares of Common Stock valued at
$97,400 in payment of bonuses granted in fiscal 1994 and 1995 and 1,642 shares
valued at $5,405 in payment of bonuses granted in fiscal 1996. As of March 31,
1996, the Company declared a preferred dividend of $15,000.
Note 6: Convertible/Redeemable Preferred Stock:
In May 1995, as settlement of a dispute with certain stockholders, 57,142 shares
of Common Stock were converted into 400,000 shares of the Company's Series A 10%
- - Cumulative Preferred Stock. Accrued dividends aggregating $15,000 are included
in accrued liabilities - unrelated parties at March 31, 1996.
The preferred stock initially was convertible into shares of Common Stock at a
conversion price of $10.50. If the Company does not redeem the preferred stock,
one-half of the preferred stock became convertible at a reduced conversion price
on March 12, 1996, and the balance becomes convertible at a reduced conversion
price on August 12, 1996. In both cases, the reduced conversion price is the
lesser of $7.00 per share or 50% of the market value for the Common Stock,
provided that the conversion price shall not be less than $1.75 per share or, if
less, the lowest price at which HealthWatch has sold Common Stock prior to the
conversion.
During June 1996, holders of the preferred stock converted 200,000 shares of the
Preferred Stock into 171,478 shares of Common Stock.
Note 7: Common Stock
During the nine months ended March 31, 1996, the Company issued an aggregate of
174,928 shares of Common Stock valued at $349,350 as the result of warrants
exercised at prices ranging from $1.75 to $2.10 per share. On May 3, 1996 the
Company announced a one-for-seven reverse split of its Common Stock, effective
May 13, 1996. The number of shares reported herein have been adjusted to reflect
the result of this reverse stock split.
No dealer, salesman or other person has been authorized in connection
with this offering to give any information or to make any representations other
than those contained in this Prospectus. This Prospectus does not constitute an
offer or a solicitation in any jurisdiction to any person to whom it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that there has been no change in the circumstances of the
Company or the facts set forth herein since the date hereof.
TABLE OF CONTENTS
Page
Available Information...............................1
Prospectus Summary..................................2
Risk Factors........................................5
Market for the Company's
Common Stock and
Related Shareholder Matters......................10
Use of Proceeds....................................10
Proforma Financial Statements......................11
Management's Discussion and Analysis
of Financial Condition and Results
of Operation....................................12
Business ..........................................19
Management.........................................32
Principal and Selling Shareholders.................36
Description of Securities..........................37
Plan of Distribution...............................41
Legal Matters......................................41
Experts ...........................................42
Financial Statements...............................F-1
HEALTHWATCH, INC.
-------------------
P R O S P E C T U S
-------------------
August __, 1996
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Minnesota Statutes Section 302A.521 provides that a Minnesota business
corporation shall indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity (as defined) of the person, against
judgments, penalties, fines, settlements and reasonable expenses incurred by the
person in connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.
Article IX of the Company's Restated Articles of Incorporation
eliminates certain personal liability of the director of the Company for
monetary damages for certain breaches of directors' fiduciary duties.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC registration fee $ 261
Nasdaq fee 2,800
Printing expenses 1,500
Fees and expenses of counsel for the Company 5,000
Fees and expenses of accountants for the Company 2,000
Transfer Agent and Registrar fees 500
Miscellaneous 2,939
---------
Total $ 15,000
All of the above expenses, other than the SEC fees, are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
1. Effective September 13, 1993, the Company issued 89,285 shares of
its Common Stock to the shareholders of Metamed, Inc. (five persons) in
connection with the merger of Metamed into a subsidiary of the Company. The
shares were acquired for investment purposes and were subject to appropriate
transfer restrictions. The shares were not registered under the Securities Act
of 1933 (the "Act") in reliance upon Section 4(2) thereof and Rule 505 of
Regulation D promulgated thereunder.
2. During October 1993, the Company issued 14,285 shares of its Common
Stock and Warrants representing the right to acquire 21,428 shares of its Common
Stock in consideration for which such investors paid $200,000. The investor
group was led by Redwood Microcap Fund, Inc. and the Rockies Fund, Inc., each of
which funds also received a warrant representing the right to acquire 17,857
shares of the Company's Common Stock at a warrant exercise price of $14.00 per
share. The securities were acquired for investment purposes and pursuant to
agreements which provided that the securities would be sold or transferred only
pursuant to the registration under the Act or pursuant to an exemption
therefrom. The securities were issued without registration under the Act in
reliance upon Section 4(2) thereof and Rule 505 of Regulation D promulgated
thereunder. One director and one former director of the Company who were not
otherwise compensated by the Company, were to receive compensation equal to five
percent of the proceeds of such financing for services rendered in connection
with obtaining and negotiating the terms of such financing.
3. During December 1993, pursuant to an agreement entered into in
October 1993, the Company issued 14,285 shares of its Common Stock and Warrants
representing the right to acquire 39,285 shares of its stock at $17.50 per share
to one institutional investor in consideration for which the investor paid
$200,000. The agreement pursuant to which the securities were acquired provided
that the investor was acquiring such securities for investment purposes and
would not sell or transfer such securities except pursuant to a registration
under the Act or pursuant to an exemption therefrom. The securities were not
registered under the Act in reliance upon Section 4(2) thereof and Regulation
505 of Regulation D promulgated thereunder.
4. During December 1993, the Company agreed to issue a warrant
representing the right to acquire 10,714 shares of its Common Stock at a warrant
exercise price of $25.20 per share to an accredited investor in consideration
for which the investor paid $30,000. The warrant was acquired for investment
purposes and pursuant to an agreement which provided that the warrant or the
shares subject thereto would not be sold or otherwise transferred except
pursuant to a registration under the Act or pursuant to an exemption therefrom.
The securities were not registered under the Act in reliance upon Section 4(2)
thereof and Regulation 505 of Regulation D promulgated thereunder.
5. During June 1994, the Company agreed to issue an aggregate of 57,142
shares of the Company's Common Stock in June and July 1994, to two institutional
investors at a purchase price of $600,000. The purchase of these shares was
completed in October, 1994. The agreements pursuant to which the shares were
purchased provided that the investors were acquiring such shares for investment
purposes and would not sell or transfer such shares except pursuant to a
registration under the Act or pursuant to an exception therefrom. The shares
were not registered under the Act in reliance upon Section 4(2) thereof and
Regulation 505 of Regulation D promulgated thereunder. During May 1995, the
57,142 shares of Common Stock were agreed to be converted into 400,000 shares of
Series A Convertible Preferred Stock and warrants representing the right to
acquire 14,285 shares at anytime from July 31, 1995 to March 31, 1996 were
issued. The Preferred Stock is redeemable at the option of the Company at a
$1.50 per share and is convertible into shares of Common Stock at a $10.50 per
share, such conversion rate being subject to adjustment based upon the future
market value for the Company's Common Stock.
6. During November 1994, the Company issued 4,285 shares of the
Company's common stock and warrants representing the right, as adjusted, to
purchase 25,714 shares of such stock at $1.75 per share to one investor for a
purchase price of $45,000. The securities were acquired for investment purposes
and were not registered under the Act in reliance upon Section 4(2) thereof and
Regulation 505 of Regulation D promulgated thereunder.
7. During November 1994, 714 shares of the Company's common stock were
authorized for issuance to one employee in lieu of a cash bonus. The shares,
which were taken for investment and were subject to appropriate transfer
restrictions, were issued without registration under the Act in reliance upon
Section 4(2) thereof.
8. During April and May 1995, seven qualified investors loaned to the
Company on a short-term basis an aggregate of $125,000 and provided standby
commitments pursuant to which they agreed to purchase up to 35,714 of the Units
subject to this offering if required for the Company to sell 107,142 Units. The
loans paid interest at the rate of 10% per annum. As additional consideration
for the making of the loans and the granting of the standby commitments, these
investors have been granted two-year warrants representing the right to purchase
up to 142,857 shares of the Company's Common Stock at $1.75 per share.
Protective Group Securities Corporation assisted the Company in arranging for
the loans and the standby commitments and was paid a fee of $6,500 in connection
therewith. The warrants, which were taken for investment and were subject to
appropriate transfer restrictions, were issued without registration under the
Act in reliance upon Section 4(2) thereof.
9. During May and June, 1995, an aggregate of 39,285 shares of the
Company's common stock were authorized for issuance to two directors in lieu of
cash compensation for services rendered. The shares, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Act in reliance upon Section 4(2) thereof.
10. Effective May 1, 1995, the Company entered into a Consultancy
Agreement pursuant to which it agreed to issue a warrant, as adjusted,
representing the right to acquire up to 114,285 shares of the Company's common
stock at $2.10 per share and issued such consultant 7,142 shares of its common
stock in consideration for services to be rendered. The warrant and shares were
acquired for investment and are subject to appropriate transfer restrictions and
were issued without registration under the Act in reliance upon Section 4(2)
thereof.
11. Effective July 27, 1995, the Company entered into an agreement
pursuant to which it has issued 7,142 shares of its common stock and agreed to
issue warrants representing the right to acquire 71,428 shares of the Company's
common stock at $2.10 per share and 28,571 shares of such stock at $3.50 per
share in consideration for services to be rendered. The shares and warrants were
acquired for investment and are subject to appropriate transfer restrictions and
were issued without registration under the Act in reliance upon Section 4(2)
thereof.
12. During June/July 1996, the Company sold warrants to purchase an
aggregate of 280,000 shares of its Common Stock to five investors at a warrant
purchase price of $.05 per share subject to the warrants. The warrants are
exercisable at a price of $2.70 per share. The warrants were acquired for
investment and are subject to appropriate transfer restrictions and were issued
without registration under the Act in reliance upon Section 4(2) thereof.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
3.1 Articles of Incorporation, as amended, of the Company (1).
3.2 Bylaws, as amended, of the Company (2).
4.1 Specimen form of the Company's Common Stock certificate(2).
4.2 HealthWatch, Inc. Stock Option Plan of 1989 (3).
4.3 Form of Incentive Stock Option Agreement (3).
4.4 Form of Nonstatutory Stock Option Agreement (3).
4.5 HealthWatch, Inc. Stock Option Plan of 1993 (4).
4.6 Subscription and Purchase Agreement dated as of the 14th
day of August 1992 between the Company and the Purchasers
of the Company's 10% convertible senior debentures due 1997
(including as an appendix thereto the form of the debenture
certificate) (5).
4.7 Warrant Agreement dated May 19, 1995 between the Company
and Corporate Stock Transfer, Inc. (6).
4.8 Warrant Agreement dated November 30, 1994 between the
Company and investor (6).
4.9 Form of Warrant Certificate -- see Exhibit A to Exhibit
4.8.
4.10 Form of Loan and Standby Purchase Agreement (6).
4.11 Exchange Agreement for Preferred Stock and Stock Purchase
Warrant (6).
4.12 Form of Subscription and Purchase Agreement, including form
of Warrant - filed herewith.
5.1 Opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A. -
filed herewith.
10.1 Lease dated October 24, 1986, including amendments thereto,
between Broomfield Properties, Inc. and the Company (5).
10.2 Lease Agreement dated November 19, 1993, between Steven P.
Cade and Wyeth W. Cade and the Company (5).
10.3 Agreement and Plan of Merger dated July 27, 1993 by and
among the Company, HealthWatch Technologies, Inc., Metamed,
Inc., John D. Greenbaum and Howard R. Everhart (7).
10.4 License Agreement dated February 27, 1992, as amended
September 13, 1993, between Howard R. Everhart and Metamed,
Inc. (5).
10.5 Second Amendment to License Agreement dated May 9, 1995
between Howard R. Everhart and HealthWatch Technologies,
Inc. (6)
10.6 Consultancy Agreement dated May 1, 1995 between
HealthWatch, Inc. and Boulder Financial Group. (6)
11 Computation of Earnings Per Share filed herewith.
21 Subsidiaries of the Company (5).
23.1 Consent of Gray, Plant, Mooty, Mooty & Bennett, P.A. (see
Exhibit 5.1).
23.2 Consent of Silverman Olson Thorvilson & Kaufmann, Ltd. --
filed herewith.
24.1 Power of Attorney (included on page II-9 of the initial
Registration Statement).
(1) Incorporated herein by reference to Registration Statement, Form 10-K
for the year ended June 30, 1990 (File No. 0-11476).
(2) Incorporated herein by reference to Registration Statement, Form S-18
(File No. 2-85688D).
(3) Incorporated herein by reference to Registration Statement, Form S-2
(File No. 33-42831).
(4) Incorporated herein by reference to Registration Statement, Form
10-KSB, for the year ended June 30, 1994 (File No. 0-11476).
(5) Incorporated herein by reference to Registration Statement, Form SB-2
(File No. 33-73462).
(6) Incorporated herein by reference to Registration Statement, Form SB-2
(File No. 33-88126).
(7) Incorporated herein by reference to Current Report, Form 8-K dated
September 13, 1993 (File No. 0-11476).
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or event arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this amended to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Vista, State of California, on July
29, 1996.
HEALTHWATCH, INC.
By /s/ Lindley S. Branson
Lindley S. Branson
President and Chief Executive Officer
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Lindley S. Branson and Annette D. Agner,
and each of them, his/her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for him/her and in his/her name,
place, and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full powers and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he/she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their or his/her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below on the 29th day of
July, 1996, by the following persons in the capacities indicated:
/s/ Lindley S. Branson President, Chief Executive Officer, Chief
- ------------------------
Lindley S. Branson Financial Officer (Principal Executive andFinancial
Officer), and a Director
/s/ Annette D. Agner Controller (Principal Accounting Officer)
- ------------------------
Annette D. Agner
/s/ Sanford L. Schwartz Director
- ------------------------
Sanford L. Schwartz
/s/ Kenneth A. Selzer, M.D. Director
Kenneth A. Selzer, M.D.
INDEX TO EXHIBITS
FILED WITH POST EFFECTIVE AMENDMENT NO. 1 TO
REGISTRATION STATEMENT ON FORM SB-2
Registration No.: ___________
Exhibit No.
Description Page No.
3.1 Articles of Incorporation, as amended, of the Company (1).
3.2 Bylaws, as amended, of the Company (2).
4.1 Specimen form of the Company's Common Stock certificate
(2).
4.2 HealthWatch, Inc. Stock Option Plan of 1989 (3).
4.3 Form of Incentive Stock Option Agreement (3).
4.4 Form of Nonstatutory Stock Option Agreement (3).
4.5 HealthWatch, Inc. Stock Option Plan of 1993 (4).
4.6 Subscription and Purchase Agreement dated as of the 14th
day of August 1992 between the Company and the Purchasers
of the Company's 10% convertible senior debentures due
1997 (including as an appendix thereto the form of the
debenture certificate) (5).
4.7 Warrant Agreement dated May 19, 1995 between the Company
and Corporate Stock Transfer, Inc. (6).
4.8 Warrant Agreement dated November 30, 1994 between the
Company and investor (6).
4.9 Form of Warrant Certificate -- see Exhibit A to Exhibit
4.8.
4.10 Form of Loan and Standby Purchase Agreement (6).
4.11 Exchange Agreement for Preferred Stock and Stock Purchase
Warrant (6).
4.12 Form of Subscription and Purchase Agreement, including
form of Warrant - filed herewith.
5.1 Opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A. -
filed herewith.
10.1 Lease dated October 24, 1986, including amendments
thereto, between Broomfield Properties, Inc. and the
Company (5).
10.2 Lease Agreement dated November 19, 1993, between Steven P.
Cade and Wyeth W. Cade and the Company (5).
10.3 Agreement and Plan of Merger dated July 27, 1993 by and
among the Company, HealthWatch Technologies, Inc.,
Metamed, Inc., John D. Greenbaum and Howard R. Everhart
(7).
10.4 License Agreement dated February 27, 1992, as amended
September 13, 1993, between Howard R. Everhart and
Metamed, Inc. (5).
10.5 Second Amendment to License Agreement dated May 9, 1995
between Howard R. Everhart and HealthWatch Technologies,
Inc. (6)
10.6 Consultancy Agreement dated May 1, 1995 between
HealthWatch, Inc. and Boulder Financial Group. (6)
11 Computation of Earnings Per Share filed herewith.
21 Subsidiaries of the Company (5).
23.1 Consent of Gray, Plant, Mooty, Mooty & Bennett, P.A. (see
Exhibit 5.1).
23.2 Consent of Silverman Olson Thorvilson & Kaufmann, Ltd. --
filed herewith.
24.1 Power of Attorney (included on page II-9 of the initial
Registration Statement).
(1) Incorporated herein by reference to Registration Statement, Form
10-K for the year ended June 30, 1990 (File No. 0-11476).
(2) Incorporated herein by reference to Registration Statement, Form
S-18 (File No. 2-85688D).
(3) Incorporated herein by reference to Registration Statement, Form
S-2 (File No. 33-42831).
(4) Incorporated herein by reference to Registration Statement, Form
10-KSB, for the year ended June 30, 1994 (File No. 0-11476).
(5) Incorporated herein by reference to Registration Statement, Form
SB-2 (File No. 33-73462).
(6) Incorporated herein by reference to Registration Statement, Form
SB-2 (File No. 33-88126).
(7) Incorporated herein by reference to Current Report, Form 8-K
dated September 13, 1993 (File No. 0-11476).
EXHIBIT 4.12
SUBSCRIPTION AND PURCHASE AGREEMENT
THIS SUBSCRIPTION AND PURCHASE AGREEMENT (the "Agreement") dated as of
the 1st day of July, 1996 by and between HEALTHWATCH, INC., a Minnesota
corporation (the "Company"), and Fred Catapano (the "Investor"). Investor and
the other persons who enter into similar Subscription and Purchase Agreements
with the Company are herein collectively referred to as the "Investors."
In consideration of the mutual promises, representations, warranties,
covenants and conditions set forth in this Agreement, the Company and the
Investor mutually agree as follows:
ARTICLE 1
DESCRIPTION OF PROPOSED FINANCING
1.1 AUTHORIZATION OF THE WARRANTS. The Company has authorized the
issuance and sale of a maximum of 300,000 Common Stock Purchase Warrants (the
Common Stock Purchase Warrants issued pursuant to this Agreement and the other
Common Stock Purchase Warrants being issued pursuant to similar Subscription and
Purchase Agreements entered into between the Company and Investors are being
herein referred to collectively as the "Warrants"). The Warrants shall be in the
form attached as Appendix A.
1.2 PURCHASE AND SALE OF THE WARRANTS. Subject to the terms and
conditions of this Agreement and in reliance upon the representations and
warranties contained herein, the Company agrees to sell to Investors at a
purchase price of $0.05 per Warrant the Warrants for which each such Investor
shall subscribe. The exact amount of each Investor's subscription is set forth
in Section 10.2 hereof.
1.3 CLOSING. Closing(s) of the purchase and sale of the Warrants
contemplated by this Agreement (herein the "Closing") shall take place at such
times as determined by the Company during the offering period. At the Closing,
the Company shall deliver to each Investor one or more Warrants, against
delivery to the Company by the Investor of a check or other form of payment
acceptable to the Company in the amount of the purchase price of the Warrants
subscribed for in Section 10.2 below.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Investors that:
2.1 MISLEADING STATEMENTS; BALANCE SHEET AND CAPITALIZATION. No
representation or warranty by the Company in this Agreement or in any written
statement or certificate furnished or to be furnished to the Investors pursuant
to this Agreement or in connection with the transactions contemplated by this
Agreement, when taken together, contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact necessary to make
the statements therein made not misleading. A copy of the Company's Annual
Report (Form 10-KSB) for the fiscal year ended June 30, 1995 and of its
quarterly report for the nine months ended March 31, 1996, have previously been
provided to each of the Investors.
2.2 DISCLOSURE. The Company has fully provided the Investor with all the
information which the Investor has requested for deciding whether to purchase
the Warrants, and all information which the Company reasonably believes is
necessary to enable the Investor to make an informed decision.
2.3 BINDING OBLIGATION. This Agreement and each additional agreement
expressly contemplated by this Agreement, constitute a valid and legally binding
obligation of the Company.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE INVESTOR
The Investor represents and warrants that:
3.1 HIGH RISK INVESTMENT. The Investor is aware that investment in the
Warrants and the Common Stock issuable upon exercise thereof (the "Common
Stock") involves substantial risks. The Investor represents that Investor
understands that an investment in this Offering should be considered only by a
person able to withstand a total loss of such investment.
3.2 BINDING OBLIGATION. This Agreement and each additional agreement
expressly contemplated by this Agreement, constitute a valid and legally binding
obligation of the Investor.
3.3 CORPORATE INVESTORS. If the Investor is a corporation, it hereby
represents and warrants that:
(a) Organization and Standing. The Investor is a corporation duly
and validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all requisite corporate power and
authority to own its properties and to carry on its business as now
conducted.
(b) Authorization. All corporate action on the part of the
Investor, its officers and directors necessary for the authorization,
execution and delivery of this Agreement and all additional agreements
expressly contemplated by this Agreement and the performance of all
obligations of the Investor hereunder have been taken.
ARTICLE 4
FEDERAL AND OTHER SECURITIES LAWS
4.1 INVESTMENT REPRESENTATIONS AND WARRANTIES. The Investor further
represents and warrants that:
(a) Investment Experience. The Investor represents that Investor
is experienced in evaluating and extending financing to companies such
as the Company, has such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of
the investment, and has the ability to bear the economic risks of the
investment and to make an informed investment decision with respect
thereto. The Investor further represents that Investor has had, during
the course of the transaction and prior to the purchase of the Warrants,
the opportunity to ask questions of, and receive answers from, the
Company concerning the terms and conditions of the Offering and to
obtain additional information (to the extent the Company possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify the accuracy of any information furnished to or to
which Investor had access.
(b) Investor Representative. If the Investor has used the
services of a Purchaser Representative, the Investor has received
confirmation in writing from such Purchaser Representative concerning
the specific details of any and all past, present or future
relationships, actual or contemplated, between himself or his affiliates
and the Company or any of its affiliates, and any compensation received
or to be received as a result of any such relationships.
(c) Acquisition for Investment for Investor's Own Account. This
Agreement is made with the Investor in reliance upon Investor's
representation to the Company, which by its acceptance hereof the
Investor hereby confirms and which by acceptance of any Warrant, the
Holder thereof shall also confirm, that the Warrants are being and the
Common Stock issuable upon exercise of the Warrants will be, unless such
securities have been registered pursuant to the Securities Act of 1933,
as amended (the "1933 Act"), and applicable state blue sky laws,
acquired for investment for Investor's own account, not as a nominee or
agent and not with a view to the sale or distribution of any part
thereof. Any resales of the Warrants or Common Stock issued upon the
exercise thereof will be in conformity with applicable law. By executing
this Agreement, Investor further represents that Investor does not have
any contract, undertaking, agreement, or arrangement with any person in
violation of any federal or state law to sell, transfer, or grant
participations to such person, or to any third person, with respect to
the Warrants or any Common Stock issued upon the exercise thereof.
Investor realizes that the basis for the exemption from the registration
requirements of the 1933 Act relied upon by the Company in connection
with the Offering, may not be present if, notwithstanding such
representation, the Investor has in mind merely acquiring the Warrants
for a fixed or determinable period and selling the Warrants in the
future, and Investor hereby confirms the absence of any such intention.
(d) Transfer or Disposition of Securities. The Investor
understands that the Warrants and any shares of Common Stock issued upon
the exercise thereof may not be sold, transferred, or otherwise disposed
of without registration under the 1933 Act, and that in the absence of
an effective registration statement, such securities must be held
indefinitely. The Investor represents that, in the absence of an
effective registration statement, it will sell, transfer, or otherwise
dispose of such securities only in a manner consistent with the
representations set forth herein and in accordance with the provisions
of this Agreement.
4.2 CERTIFICATE LEGENDS. The Investor agrees that all certificates
evidencing the Warrants and any shares of Common Stock issued upon the exercise
thereof shall bear a legend in substantially the following form, and by which
the Investor agrees to be bound:
THE SECURITY DESCRIBED HEREIN HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR UNDER THE
SECURITIES LAWS OF ANY STATE. NO SALE OR DISTRIBUTION OF THIS SECURITY
MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE 1933 ACT AND APPLICABLE
STATE BLUE SKY LAWS.
4.3 STOP TRANSFER INSTRUCTION. The Company shall make a notation
regarding the restrictions on transfer of the Warrants in its stock books, and
the Company shall not be required to transfer on its books any of such
securities that have been sold or transferred in violation of any of the
provisions of this Agreement, or to treat as the owner of such securities any
transferee to whom such securities have been so transferred.
ARTICLE 5
CONDITIONS TO INVESTOR'S OBLIGATIONS AT THE CLOSING
The obligations of the Investor under Section 1.2 of this Agreement are
subject to the fulfillment on or before the Closing of each of the following
conditions:
5.1 REPRESENTATIONS AND WARRANTIES TRUE ON THE CLOSING DATE. The
representations and warranties of the Company contained in Article 2 shall be
true on and as of the Closing with the same force and effect as if they had been
made at the Closing.
5.2 PERFORMANCE. The Company shall have conformed and complied with all
agreements and conditions contained in this Agreement required to be performed
or complied with by it on or before the Closing.
5.3 QUALIFICATIONS. All authorizations, approvals, or permits, if any,
of any governmental authority or regulatory body of any state, that are required
in connection with the lawful issuance and sale of the Warrants pursuant to this
Agreement shall have been duly obtained and shall be effective on and as of the
Closing.
5.4 DELIVERY OF CERTIFICATES. The Investor shall have received one or
more Warrant certificates representing the Warrants which the Investor is
purchasing at the Closing.
ARTICLE 6
CONDITIONS TO THE COMPANY'S OBLIGATIONS AT CLOSING
The obligations of the Company under Section 1.2 of this Agreement are
subject to the fulfillment on or before the Closing of each of the following
conditions as to the Investor:
6.1 REPRESENTATIONS AND WARRANTIES TRUE ON THE CLOSING. The
representations and warranties of the Investor contained in Articles 3 and 4
shall be true on and as of the Closing with the same force and effect as if they
had been made at the Closing.
6.2 QUALIFICATIONS. All authorizations, approvals, or permits, if any,
of any governmental authority or regulatory body of any state that are required
in connection with the lawful issuance and sale of the Warrants pursuant to this
Agreement shall have been duly obtained and shall be effective on and as of the
Closing.
6.3 PAYMENT OF PURCHASE PRICE. Investor shall have delivered to the
Company the total consideration for the Warrants which the Investor is
purchasing at the Closing.
ARTICLE 7
WARRANTS
7.1 TERM AND EXERCISE PRICE OF WARRANTS. Each Warrant initially
represents the right to acquire one share of Common Stock, $0.07 par value, of
the Company. The exercise price for the Warrants shall be equal to $2.70 per
share to be acquired. The Warrants shall expire upon the earlier of 90 days
after the effective date under the 1933 Act of a registration statement for the
shares of Common Stock issuable upon the exercise of the Warrants or June 30,
1997.
7.2 REISSUE OF WARRANTS. No Warrant shall be reissued with respect to
any portion of the Warrant which is exercised, and the Company shall cancel and
terminate any Warrant which has been fully exercised or presented to it for
exchange pursuant to any provision of this Agreement.
7.3 REGISTRATION AND TRANSFER OF WARRANTS.
(a) The Company shall, at all times while any Warrants are
outstanding, act as the registrar of the Warrants and shall cause to be
kept at its principal office in California, or in such other place or
places and by such other registrar or registrars, if any, as the Company
may designate, a register in which shall be entered the names and
addresses of the Warrants ("Holders") and particulars of the Warrants
held by them respectively and of all transfers of Warrants. The name of
the Holder shall be noted on the certificates for the Warrants by the
Company or other registrar.
(b) No transfer of a Warrant shall be valid unless made by the
Holder or his executors or administrators or other legal representatives
or his or their attorney duly appointed by an instrument in writing in
form and execution satisfactory to the Company, upon compliance with the
provisions of this Agreement and the Warrants, as the case may be, and
such other requirements as the Company and/or other registrar may
reasonably prescribe, and unless such transfer shall have been duly
entered on the appropriate register and/or noted on such Warrant by the
Company or other registrar. The person in whose name a Warrant is
registered shall be deemed to be the owner thereof.
7.4 EXCHANGES OF WARRANTS. Warrants of any authorized denomination may
be exchanged for Warrants of any other authorized denomination or denominations,
any such exchange to be for Warrants of an equal amount, as requested by the
Holders. Any exchange of Warrants may be made at the offices of the Company or
at the offices of any registrar where a register is maintained for the Warrants
pursuant to the provisions of Section 7.3. Any Warrants tendered for exchange
together with a sum sufficient to cover any tax or other governmental charge
payable in connection with the transfer shall be surrendered to the Company or
appropriate registrar and shall be canceled.
ARTICLE 8
REGISTRATION RIGHTS
8.1 REGISTRATION. The Company will promptly take all necessary steps to
register or qualify, under the 1933 Act and the securities laws of such states
as the Holders may reasonably request, the shares of Common Stock issuable upon
exercise of the Warrants, provided, however, that the Company shall not for any
purpose be required to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction wherein it
is not so qualified. The Company shall be obligated to prepare, file and cause
to become effective only one registration statement pursuant to this Section 8.1
and to pay all costs and expenses associated with such registration statement as
provided in Section 8.2. The Company shall keep effective and maintain any
registration, qualification, notification or approval specified in this Section
8.1 for a period of up to one hundred eighty (180) days.
8.2 EXPENSES. With respect to the inclusion of securities in a
registration statement pursuant to Section 8.1, the Company shall bear the
following fees, costs and expenses: all registration, filing and NASD fees,
printing expenses, fees and disbursements of counsel and accountants for the
Company, and legal fees and disbursements and other expenses of complying with
state securities laws of any jurisdictions in which the securities to be offered
are to be registered or qualified. Fees and disbursements of special counsel and
accountants for the selling Holders, underwriting discounts and commissions, and
transfer taxes for selling Holders and any other expenses relating to the sale
of securities by the selling Holders not expressly included above shall be borne
by the selling Holders.
8.3 INDEMNIFICATION. The Company hereby indemnifies each of the Holders
and the officers and directors, if any, who control such Holders, within the
meaning of Section 15 of the 1933 Act, against all losses, claims, damages, and
liabilities caused by (1) any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement or Prospectus (and as
amended or supplemented if the Company shall have furnished any amendments
thereof or supplements thereto), any Preliminary Prospectus or any state
securities law filings; (2) any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading except insofar as such losses, claims, damages, or
liabilities are caused by any untrue statement or omission contained in
information furnished in writing to the Company by such Holder expressly for use
therein; and each such Holder by its acceptance hereof severally agrees that it
will indemnify and hold harmless the Company, each of its officers who signs
such Registration Statement, and each person, if any, who controls the Company,
within the meaning of Section 15 of the 1933 Act, with respect to losses,
claims, damages, or liabilities which are caused by any untrue statement or
alleged untrue statement, omission or alleged omission contained in information
furnished in writing to the Company by such Holder expressly for use therein.
ARTICLE 9
MISCELLANEOUS
9.1 SURVIVAL OF WARRANTIES. The warranties, representations and
covenants contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing(s) and shall in no way
be affected by any investigation of the subject matter thereof made by or on
behalf of the Company or the Investors, as the case may be.
9.2 ENTIRE AGREEMENT. This Agreement and the Appendix hereto constitutes
the entire agreement between the parties, and no party shall be liable or bound
to another party in any manner by any warranties, representations or covenants
except as specifically set forth herein or therein. The terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any third party any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
9.3 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
9.4 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
9.5 NOTICES. Any notice required or permitted under this Agreement shall
be given in writing and shall be deemed effectively given upon personal delivery
or seven (7) days after deposit with the Warranted States Post Office, by
registered or certified mail, postage prepaid, addressed to the Company at 2445
Cades Way, Vista, California 92083, and to the Investor at the address specified
below or at such other address as a party may designate by ten (10) days'
advance written notice to the other parties.
9.6 EXPENSES. The Company shall pay all costs and expenses that it
incurs with respect to the negotiation, execution, delivery and performance of
the Offering, and each Investor shall pay all costs and expenses that it incurs
with respect to the negotiation, execution, delivery and performance of this
Agreement.
9.7 RIGHTS OF INVESTORS. Each Holder of Warrants shall have the absolute
right to exercise or refrain from exercising any right or rights that such
holder may have by reason of this Agreement or any Warrant or share of stock,
including without limitation the right to consent to the waiver of any
obligation of the Company under this Agreement and to enter into an agreement
with the Company for the purpose of modifying this Agreement or any agreement
effecting any such modification, and such holder shall not incur any liability
to any other holder or holders of such securities with respect to exercising or
refraining from exercising any such right or rights.
9.8 SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provisions shall be excluded from
this Agreement, and the balance of this Agreement shall be interpreted as if
such provisions were so excluded and shall be enforceable in accordance with its
terms.
9.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. The term this "Agreement"
as used herein includes this and similar Subscription and Purchase Agreements
entered into in connection with the offering of up to 250,000 Warrants pursuant
to this Offering.
ARTICLE 10
SUBSCRIPTION
10.1 MINIMUM SUBSCRIPTION. The minimum subscription per Investor
permitted in this Offering is 25,000 Warrants; provided, however, that the
Company may, in its sole discretion, lower the minimum investment in accordance
with applicable law.
10.2 SUBSCRIPTION AMOUNT. The undersigned hereby subscribes for 62,500
Warrants at $0.05 per Warrant and shall tender at Closing a check or bank draft
in the amount of Three Thousand One Hundred Twenty-Five Dollars ($3,125) payable
to the Company in full payment for such subscription.
10.3 RESALE COMPLIANCE. The undersigned agrees to comply with the 1933
Act and the rules and regulations promulgated thereunder, and any other relevant
securities legislation and policies governing the purchase, holding and resale
of the Warrants subscribed for, including, without limitation, applicable state
blue sky laws.
Entered into this day of July, 1996.
__________________________________________
(Name) (Please Print)
__________________________________________
(Signature)
__________________________________________
Mailing Address)
__________________________________________
(Registration Instructions)
THIS SUBSCRIPTION IS ACCEPTED BY THE COMPANY ON THE DAY OF July, 1996.
HEALTHWATCH, INC.
By:_____________________________
Its______________________
Appendix A
SEE PARAGRAPH 7 FOR RESTRICTIONS ON THE TRANSFER OF THIS WARRANT
No. BA-3
Warrant
to Purchase 62,500 Shares
WARRANT TO PURCHASE SECURITIES OF
HEALTHWATCH, INC.
THIS CERTIFIES THAT for value received Fred Catapano is entitled,
subject to the terms and conditions hereinafter set forth, to purchase from
HEALTHWATCH, INC., a Minnesota corporation (the "Company"), 62,500 fully paid
and non-assessable shares of Common Stock of the Company (herein called the
"Common Stock"), upon presentation and surrender of this Warrant with the
Subscription Form duly executed, at the principal office of the Company or at
such other office as shall have theretofore been designated by the Company by
notice pursuant hereto and upon payment therefor of the Purchase Price, in
lawful money of the United States of America, determined as set forth below. The
term of this Warrant shall commence on the date hereof, and terminate, if not
exercised prior thereto, on the earlier of 5:00 p.m. California Time, 90 days
following the effective date under the Securities Act of 1933 (the "1933 Act")
of a registration statement relating to the shares of Common Stock issuable upon
the exercise of this Warrant or 5:00 p.m. California Time, on June 30, 1997.
This Warrant is subject to the following terms and conditions:
1. The purchase rights represented by this Warrant are exercisable at
the option of the Holder, in whole at any time, or in part from time to time
(but not as to a fractional share of stock). In the case of the purchase of less
than all the securities purchasable under this Warrant, the Company shall cancel
this Warrant upon the surrender hereof and shall execute and deliver a new
Warrant of like tenor for the balance of the securities purchasable hereunder.
2. The purchase price for each security purchasable pursuant to the
exercise of this Warrant shall be Two Dollars Seventy Cents ($2.70) per share to
be acquired, such price being sometimes hereinafter referred to as the "Base
Purchase Price". The Base Purchase Price and, from time to time, the number of
securities subject to purchase hereunder are subject to adjustment in certain
circumstances provided for below, and the Base Purchase Price, as it may be
adjusted from time to time, is hereinafter referred to as the "Purchase Price".
(a) In case the Company shall (i) pay a dividend in shares of its
capital stock (other than an issuance of shares of capital stock to
holders of Common Stock who have elected to receive a dividend in shares
in lieu of cash), (ii) subdivide its outstanding shares of Common Stock,
(iii) reduce, consolidate or combine its outstanding shares of Common
Stock into a smaller number of shares, or (iv) issue by reclassification
of its shares of Common Stock any shares of the Company, the Purchase
Price in effect immediately prior thereto shall be adjusted to that
amount determined by multiplying the Purchase Price in effect
immediately prior to such date by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding on such date
before giving effect to such division, subdivision, reduction,
combination or consolidation or stock dividend and of which the
denominator shall be the number of shares of Common Stock after giving
effect thereto. Such adjustment shall be made successively whenever any
such effective date or record date shall occur. An adjustment made
pursuant to this subsection (a) shall become effective retroactively,
immediately after the record date in the case of a dividend and shall
become effective immediately after the effective date in the case of a
subdivision, reduction, consolidation, combination or reclassification.
(b) If the Capital Stock of the Company shall be changed into the
same or a different number of shares of any class or classes of stock,
whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend provided
for above, or a reorganization, merger, consolidation or sale of
substantially all of the Company's assets), then, and in each such
event, the Holder of this Warrant shall have the right thereafter to
purchase the kind and amount of shares of stock and other securities and
property receivable upon such reorganization, reclassification, or other
change which could have been purchased pursuant to the exercise of this
Warrant, as reasonably determined by the Company's board of directors,
immediately prior to such reorganization, reclassification, or change,
all subject to further adjustment as provided herein.
(c) If at any time or from time to time there shall be a capital
reorganization of the stock of the Company (other than a subdivision,
combination, reclassification or exchange of shares provided for
elsewhere herein) or a merger or consolidation of the Company with or
into another corporation, or the sale of all or substantially all of the
Company's properties and assets to any other person, then, as a part of
such reorganization, merger, consolidation or sale, provision shall be
made as reasonably determined by the Company's board of directors so
that the Holder of this Warrant shall thereafter be entitled to receive
upon exercise of this Warrant, the number of shares of stock or other
securities or property of the Company or of the successor corporation
resulting from such merger or consolidation or sale, to which a Holder
of stock deliverable upon exercise of this Warrant would have been
entitled on such capital reorganization, merger, consolidation or sale.
(d) The adjustments provided for herein are cumulative and shall
apply to successive divisions, subdivisions, reductions, combinations,
consolidations, issues, distributions or other events contemplated
herein resulting in any adjustment under the provisions of this section,
provided that, notwithstanding any other provision of this section, no
adjustment of the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the
Purchase Price then in effect; provided, however, that any adjustments
which by reason of this subsection (d) are not required to be made shall
be carried forward and taken into account in any subsequent adjustment.
(e) Upon each adjustment of the Purchase Price, the Company shall
give prompt written notice thereof addressed to the registered Holder of
this Warrant at the address of such Holders as shown on the records of
the Company, which notice shall state the Purchase Price resulting from
such adjustment and the increase or decrease, if any, in the number of
shares issuable upon the exercise of this Warrant, setting forth in
reasonable detail the method of calculation and the facts upon which
such calculation is based.
3. In case at any time:
(a) The Company shall declare any cash dividend on its Common
Stock at a rate in excess of the rate of the last cash dividend
theretofore paid;
(b) The Company shall pay any dividend payable in stock upon its
Common Stock or make any distribution (other than regular cash
dividends) to the holders of its Common Stock;
(c) The Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class
or other rights;
(d) There shall be any capital reorganization, or
reclassification of the capital stock of the Company or consolidation or
merger of the Company with, or sales of all or substantially all of its
assets to, another corporation; or
(e) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give written notice,
by first class mail, postage prepaid, addressed to the Holder at the address of
such holder as shown on the books of the Company, of the date on which (1) the
books of the Company shall close or a record shall be taken for such dividend,
distribution or subscription rights, or (2) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also specify
the date as of which the holders of Common Stock of record shall participate in
such dividend, distribution or subscription rights, or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding up, as the case may be. Such written notice shall be
given at least 20 days prior to the action in question and not less than 20 days
prior to the record date or the date on which the Company's transfer books are
closed in respect thereto.
4. If any event occurs as to which, in the sole opinion of the Board of
Directors of the Company, the other provisions of this Warrant are not strictly
applicable or if strictly applicable would not fairly protect the rights of the
Holder in accordance with the essential intent and principles of such
provisions, then the Board of Directors shall make such adjustment in the
application of such provisions as may be necessary, in the sole judgment of such
Board, in accordance with such essential intent and principles, to protect such
rights as aforesaid.
5. Exercise of this Warrant shall be made by the surrender hereof by the
Holder to the Company at its principal office together with (i) the attached
Subscription Form designating the number of shares of Common Stock being
purchased, (ii) a certified check or cash in payment for such shares and (iii) a
letter of transmittal setting forth the computation of the amount of said
payment. The Company shall thereafter promptly (in any event within seven (7)
business days after such exercise) issue certificates for securities of the
Company purchased at the Purchase Price in effect at the time of such exercise.
The Holder shall be deemed to be the record owner of such securities as of the
close of business on the date of such exercise. The Holder shall not be entitled
to receive a fractional share, but in lieu thereof the Company shall pay in cash
an amount equal to the market value of such fractional share if stock has a
market value, or if not, the book value of such fractional share. The Company
shall thereupon cancel this Warrant; and in the event that less than the entire
number of shares purchasable are purchased, shall issue a new Warrant for the
number not so purchased.
6. The Company covenants and agrees that all shares which may be issued
upon the exercise of this Warrant will, upon issuance, be duly and validly
authorized and issued, fully paid and nonassessable, and free from all taxes,
liens and charges with respect to the issue thereof. The Company further
covenants and agrees that during the period within which this Warrant may be
exercised, the Company will at all times have authorized and reserved for the
purpose of the issue upon exercise of this Warrant a sufficient number of shares
of its securities to provide for such exercise.
7. (a) The Holder represents that he is acquiring this Warrant and, in
the absence of an effective registration statement under the 1933 Act for the
securities issuable hereunder, such securities for the purpose of investment and
not with a view to or for sale in connection with any distribution thereof. The
Holder and the holder of any securities issued upon exercise hereof, by his
acceptance hereof, agrees that he/she/it will notify the Company in writing
before selling or otherwise disposing of this Warrant or any securities issued
to him/her/it upon exercise hereof, describing briefly the nature of any such
sale or other disposition, and no such sale or other disposition shall be made
unless and until (i) the Company has received an opinion of counsel reasonably
acceptable to it that no registration (or perfection of an exemption) under the
1933 Act is required with respect to such sale or disposition (which opinion may
be conditioned upon the transferee's assuming the Holder's obligation under this
paragraph 7) or (ii) an appropriate registration statement with respect to such
Warrant or such Common Stock, or both, has been filed with the Securities and
Exchange Commission (the "Commission") and declared effective by the Commission.
The Company may require that this Warrant and certificates representing the
securities issued upon exercise hereof be stamped or imprinted with an
appropriate legend reflecting the foregoing restrictions. For the purposes of
this paragraph 7, the term "Securities" shall include this Warrant and the
securities issued or issuable upon the exercise hereof.
(b) The restrictions imposed by this paragraph 7 on the transfer
of the Securities shall terminate as to any portion of the Securities
when:
(i) Such portion of the Securities shall have been effectively
registered under the 1933 Act and sold by the holder thereof in
accordance with such registration or exemption; or
(ii) Written opinions to the effect that such a registration is
no longer required or necessary under any Federal or State law or
regulation of governmental authority shall have been received from legal
counsel for the Company and counsel for the holder of such portion of
the Securities; or, if a favorable opinion is obtained from holder's
counsel, and counsel for the Company declines to render such an opinion,
upon the holder's undertaking to indemnify the Company, on terms
satisfactory to the Company, against all liability or loss the Company
may sustain in connection with such transfer; or
Whenever the restrictions imposed by this paragraph 7 shall terminate,
as provided above, any holder of the Securities as to which such restrictions
shall have terminated shall be entitled to receive promptly from the Company,
without expense to him, a new certificate, not bearing the restrictive legend
referred to in clause (a) hereof.
8. The Holder of this Warrant has certain registration rights with
respect to the Securities, as set forth in Article 8 of the Subscription and
Purchase Agreement between the original purchaser hereof and the Company.
9. This Warrant is exchangeable, upon the surrender hereof by the
Holder at the principal office of the Company, for new warrants of like tenor
and date representing in the aggregate the right to purchase the number of
shares purchasable hereunder, each of such new Warrants to represent the right
to purchase such number of shares as shall be designated by said Holder at the
time of such surrender. Subject to paragraph 7 hereof, this Warrant and all
rights hereunder are transferable in whole or in part by the Holder, in person
or by duly authorized attorney, upon surrender of this Warrant duly endorsed, at
the principal office of the Company.
10. Upon the receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will make and deliver a new Warrant of like tenor, in
lieu of this Warrant.
11. All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid or delivered to a telegraph office for
transmission:
(a) If to the Holder, at such address as may have been furnished
by such holder to the Company in writing; and
(b) If to the Company, at such address as may have been
furnished by the Company to the Holder of this Warrant in writing.
12. This Warrant shall be binding upon any successors or assigns of the
Company.
13. This Warrant shall be construed in accordance with and governed by
the laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and delivered as of the date set forth below by one of its officers
thereunto duly authorized.
Dated: ______________, 1996.
HEALTHWATCH, INC.
By__________________________
Lindley S. Branson, President
SUBSCRIPTION FORM
To be signed only upon exercise of Warrant
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for and to
purchase thereunder, ______________ of the shares of Common Stock of
HEALTHWATCH, INC. to which such Warrant relates, and herewith makes payment of
$______ therefor, in cash or by certified check, and requests that the
certificates for such shares be issued in the name of, and be delivered
to,________________________________ , the address for which is set forth below
the signature of the undersigned.
Dated:________________
___________________________
(Signature)
___________________________
___________________________
(Address)
___________________________
To be signed only upon transfer of Warrant
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________ the right to purchase _________ shares of Common Stock of
HEALTHWATCH, INC. to which the within Warrant relates and appoints
____________________________, attorney, to transfer said right on the books of
HEALTHWATCH, INC. with full power of substitution in the premises.
Dated:_________________________
___________________________
(Signature)
___________________________
___________________________
(Address)
EXHIBIT 5.1
LINDLEY S. BRANSON
612 343-2827
July 26, 1996
HealthWatch, Inc.
2445 Cades Way
Vista, California 92083
RE: Registration Statement on Form SB-2
Gentlemen:
This opinion is furnished in connection with the registration, pursuant
to the Securities Act of 1933, as amended ("Act"), of an aggregate of 280,000
shares of the Common Stock, $.07 par value (the "Shares"), of HealthWatch, Inc.
(the "Company").
We have acted as counsel to the Company in connection with the
preparation of the Registration Statement on Form SB-2. We have examined the
Articles of Incorporation, as amended, and the Bylaws of the Company, such
records of proceedings of the Company as we deemed material and such other
certificates, records and documents as we considered necessary for the purposes
of this opinion.
Based on the foregoing, we are of the opinion that upon the issuance
and delivery of the Shares as described in the aforementioned Registration
Statement, the Shares will be legally issued, fully paid and non-assessable
securities of the Company.
The foregoing assumes that all requisite steps will be taken to comply
with the requirements of the Act and applicable requirements of state laws
regulating the offer and sale of securities.
We understand that this opinion is to be used in connection with the
Registration Statement. We consent to a filing of a copy of this opinion with
the Registration Statement.
Very truly yours,
GRAY, PLANT, MOOTY,
MOOTY & BENNETT, P.A.
By /s/ Lindley S. Branson
Lindley S. Branson
LSB/pbk
HEALTHWATCH, INC.
EXHIBIT 11 - COMPUTATION OF INCOME (LOSS) PER SHARE
JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Loss from continuing operations $(1,830,454) $(2,840,613)
Extraordinary item 61,603 24,328
----------- -----------
Net loss $(1,768,851) $(2,816,285)
=========== ===========
Weighted average shares outstanding before
exercise of stock options and warrants and repurchases 402,310 272,731
Increase in weighted average shares outstanding due
to exercise of stock options and warrants -- 543
Decrease in weighted average shares outstanding due
to repurchase under treasury stock method -- -- *
----------- -----------
Total weighted average shares outstanding 402,310 273,274
=========== ===========
Income (loss) per share:
Continuing operations $ (4.55) $ (10.39)
Extraordinary items .15 .09
----------- -----------
Net loss per share $ (4.40) $ (10.30)
=========== ===========
</TABLE>
* Not included in calculation as effect would be anti-dilutive.
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use of our report dated August 18, 1995, except for
Note 20 which is dated May 13, 1996, accompanying the consolidated financial
statements of HealthWatch, Inc. as of June 30, 1995 and 1994, included in the
Company's Registration Statement on Form SB-2 and to the reference made to our
firm under the caption "Experts" in the aforementioned Registration Statement
expected to be filed by HealthWatch, Inc. on or about July 26, 1996.
/s/ SILVERMAN OLSON THORVILSON & KAUFMANN LTD
SILVERMAN OLSON THORVILSON & KAUFMANN LTD
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota
July 26, 1996
